Bank of England Quick Analysis: Three dovish things that are set to keep Sterling down for longer
- The Bank of England raised rates by 50 bps as expected to 4%, but seemed cautious about the future.
- A significant minority wanted more dovish policy.
- Gloomy forecast point to ongoing pressure on the Pound.
Buy the rumor, sell the fact? That is the instant market reaction in GBP/USD – but likely a short-lived on. The Bank of England (BOE) made a classic "dovish hike. There are some hawkish comments, like mentions of higher inflation, but there are several downbeat parts.
Here are three dovish blows to the Pound:
First, two members voted to leave rates unchanged. While the Monetary Policy Committee consists of nine members, it is essential to note that only one member opted for leaving borrowing costs unchanged in December. Another preferred 25 bps and now wants to hold. The minority favoring a pause is growing.
Secondly, the BOE lowered its inflation forecasts, seeing price rises ending 2023 at just under 4%, a substantial fall from over 5% in the previous outlook. That is a meaningful comedown.
Third, the BOE has downgraded its language regarding more rate hikes – it removed the word "forcefully" related to raising rates. While that is not a signal of an imminent pause, it could easily be interpreted as a sign the BOE will slow down to 25 bps next time.
And while the "Old Lady" only sees a shallow recession at this point, it is still using this R-word – different from the Federal Reserve and the European Central Bank. The BOE remains more dovish than others.
There are good reasons to be gloomy on the UK economy: strikes, unresolved Brexit issues, low productivity and also downbeat forecasts from the International Monetary Fund. The BOE has just put its stamp of approval to the gloom – a critical seal of approval.
It should keep the Pound depressed across the board – and for longer.
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Author
Yohay Elam
FXStreet
Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.
