EUR/GBP Ticks Higher Ahead of BoE Rate Decision

EUR/GBP Ticks Higher Ahead of BoE Rate Decision

EUR/GBP Ticks Higher Ahead of BoE Rate Decision

ING's base case is for two of the nine MPC members to dissent and call for higher borrowing costs at the decision at noon in London, and for the central bank to downplay soft economic first-quarter growth and signal that a rate increase later this year is still in the cards.

The BoE said it expected Britain's economy would grow by 1.4 per cent this year, down from the 1.8 per cent rate it predicted in February, which was a bit above what most economists thought likely at the time.

At the latest meeting, seven members voted to keep interest rates on hold and two, Ian McCafferty and Michael Saunders, voted for an increase. There has been no sharp increase in swap rates or fixed rates in the mortgage market.

At its February meeting, the MPC suggested a rate rise would be needed "somewhat earlier" and to a "somewhat greater extent" than anticipated in order to bring inflation back to its 2% target. Versus the euro, the pound slumped 0.7% to around 1.13.

Sterling reached $1.43 last month on optimism of a May hike; now the pound appears to be pricing in a dovish inflation report and a weak GDP outlook with little prospect for further hikes this year; as a result, the pound was languishing at $1.35 ahead of Super Thursday, after wiping out all of its gains versus the dollar this year.

"As previously, however, that judgement relies on the economic data evolving broadly in line with the Committee's projections", it continued, suggesting that if the United Kingdom economy remains weak, rate hikes may not be on the table.

The Bank said that there may be a small rise in inflation in the coming months due to higher oil prices, but this should have little effect on the longer-term outlook.

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'In a world where other central banks are seeking to normalise their rates, the combination of slow growth and Brexit uncertainty must surely be raising some concerns about the size of the current account deficit'.

Investec said: "With a rate hike now seemingly off the table, the market will be focused on the rationale for the BoE's abrupt U-turn having signalled a rate hike in March".

"A month or so ago it looked like a May rate rise was a near-certainty".

They repeated their calls for a rise to 0.75% to avoid more "abrupt" policy action further down the line.

But the Bank's quarterly forecasts revealed there was some doubt around the underlying economic picture in the United Kingdom, clouded by the recent weather impact, with the Bank noting "greater-than-usual uncertainty" over consumer spending.

The inflation report also reduced inflation forecasts to 2.4% in Q2 - from 2.7% previously - and by a basis point in the following years.

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