Pound slides as BoE deliver dovish hold

The Bank of England have kept their base rate unchanged at 0.75% as was almost unanimously expected, with a 9-0 vote split amongst rate-setters. The Pound has dropped to its lowest level in almost 3 weeks in the initial reaction and fallen back below the $1.29 handle, although it should be stated that the market reaction is fairly muted. Amongst the most dovish news was the lowering of economic growth forecasts for both this year and next and the statement that the bank sees one rate hike fully price in over the next 3 years. The bank also forecasts inflation, as measured by CPI to move below the 2% level in the coming months, largely due to a fall in fuel prices.

On the whole it seems like Governor Carney and his fellow rate-setters are erring on the side of caution as far as rate increase are concerned for the time being and this is weighing on the pound a little. The Elephant in the room here remains Brexit, and while the bank are basing their future policy path on a smooth and orderly outcome, this is far from a given. Any adverse developments on this front would almost certainly cause the bank to adopt a more accommodative stance and this would weigh on sterling going forward. As is the case with most things in the UK economy at present, the future actions of the bank will be guided to a large degree by the outcome of Brexit, and Carney & Co seem to be understandably non-committal on what they’ll do next while such high levels of uncertainty persist.      

The recent data has no doubt been weak with an All-Sector PMI falling to 50.3 for January - the  second-lowest print for this metric in over 6 years. Ahead of this announcement the money markets were pricing in an almost 50:50 chance of a interest rate hike this year, which, given the recent soft data and massive levels of Brexit uncertainty looks more than a tad optimistic. The only real theme that supports further monetary tightening is the welcome rise in wages, with total annual pay in nominal terms increasing by 3.4% according to the latest data, representing the highest annual growth rate since the 3 month period to July 2008.

This coupled with continued strength in the labour market may be seen to present a growing risk of increasing inflationary pressures, but the CPI readings aren’t really suggesting any cause for concern. A relatively low Oil price is another positive here for inflation hawks and rather than looking to raise rates further, the BoE should be enjoying a sustained period of real wage growth after a long period where workers earnings were squeezed.