BoE focuses on where inflation is likely to be in two years' time: May 7, 2015

Intra-Day Market Moving News (GBP/USD)
07 May 2015   02:01GMT

Talk of rate rises may sound premature after the latest economic data. Britain's economic growth halved in the first quarter of 2015, and the BoE has said it expects inflation to fall below zero in the coming months.

However, the BoE focuses on where inflation is likely to be in two years' time, n prices could pick up if growth accelerates in the euro zone, oil prices rise n Britain's weak productivity fails to improve.

Markets have been repeatedly wrong footed by the BoE. Almost a year ago, it warned that they were underestimating the chance of a rate rise, causing a jump in sterling. Then oil prices tumbled, reducing pressure to fight off inflation.

Weak economic growth in Britain of just 0.3% in the first 3 months of 2015 has increased the chance that the BoE will trim its forecast for 2.9% growth this year but is less likely to hurt its identical growth forecast for 2016.

Economists also think the BoE may cut its forecast for annual wage growth of 3.5% late this year, after wage rises remained tepid in the early part of 2015.

While Britain's politicians are likely to be struggling to form a gov't next week, the BoE will look further ahead and consider whether markets are too relaxed about the prospect of higher interest rates.

The BoE is expected to keep rates at a record-low 0.5% -- their level for more than 6 years -- at its monthly meeting on Mon, according to every economist polled by Reuters this week.
But on Wednesday, BoE Governor Mark Carney may expand on a recent observation by the Bank that financial markets expected only an "exceptionally slow" pace of interest rate rises. That caused investors to bring forward their rate hike expectations.

Britain's election on Thursday looks unlikely to give one party a majority, and a gov't may not be in place by the time Carney presents a quarterly update of the BoE's forecasts.
In any case, it will be too soon for the BoE to reach a view on how any new economic policies might affect growth.