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Pound Plummets on Dovish BoE: Blip in the Trend or Full-Scale Reversal?

Pound Plummets on Dovish BoE: Blip in the Trend or Full-Scale Reversal?

Carney today also warned that uncertainty was weighing on growth prospects, harming the investment which the Bank expects to make up for sagging consumer spending.

In its quarterly Inflation Report, the Bank cut its United Kingdom growth forecast to 1.7% for this year, down from 1.9% previously, while growth is now tipped to slow to 1.6% in 2018, down from a previous forecast of 1.7%.

The rise in prices sits alongside weak average earnings growth in the country, reducing the chances of an interest rate hike from the bank this year mirroring the policy of monetary tightening in the US.

The pound fell 0.4% to 1.3167 against the dollar as of 12.39pm in London, after rising to 1.3267, the highest since Sept 15.

Sterling bounced on Friday, a day after posting its biggest daily loss in a month, as some investors consolidated positions after the Bank of England kept interest rates at record lows and lowered its growth and inflation forecasts.

The news, which followed a regular monetary policy meeting, sent the pound slumping as policymakers appeared to shift away from raising rates any time soon. For example, Howard Archer, chief economist of the EY ITEM Club, has predicted rates will rise to 0.5 per cent by the third quarter of 2018.

In June's meeting, three members of the MPC voted for a rise. "In the MPC's central forecast, GDP growth remains sluggish in the near term as the squeeze on households' real incomes continues to weigh on consumption", the bank said. Monetary policy cannot prevent the weaker real incomes likely to accompany the move to new trading arrangements with the European Union, but it can influence how this hit to incomes is distributed between job losses and price rises.

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The decision comes a year after rates were cut to 0.25% last August following the Brexit vote.

Mark Carney, the bank's governor, said that businesses are now putting investments on hold because of uncertainty over Brexit.

The UK is likely to see a new normal of interest rate hikes in the future as Brexit fuels inflation, the Bank of England's deputy governor said in an interview with the BBC.

Prior to June's inflation reading of 2.6%, there had been growing clamour for a rate rise as a Brexit-fuelled increase in the cost of living ramps up pressure on hard-pressed households.

"The case for any near-term interest rate hike has been watered down by inflation dipping in June, while United Kingdom growth remains stuck in a low gear". "The committee would continue to monitor closely the incoming evidence, and stood ready to respond to changes in the economic outlook as they unfolded to ensure a sustainable return of inflation to the 2% target".

As inflation rises, the BoE expects to see a fall in household disposable incomes, in real terms, this year.

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