Last week saw the release of the Bank of England’s quarterly inflation report which as a whole has been perceived as an upbeat release from the central bank. In terms of the growth estimates, this year is expected to be 1.6% up from 1.4% previously thought, and for next year annual growth is anticipated to be 2.8% rather than the 2.5% predicted in August. These expectations are further signals that the economy is gradually getting back to speed. However, Carney did state headwinds remain and there is a “long way to go” before the crisis aftermath has cleared.
Elsewhere, with regards to the inflation levels in the UK, the BoE have now cut the near term inflation outlook on lower data and see inflation below the target from Q1 2015. If this does actually continue to cool, then the central bank will not need to rush and raise their benchmark rate.
Looking into unemployment, which is important as Carney linked this to rate guidance outlook, the bank believes there is a 2 out of 5 chance that the unemployment rate which currently stands at 7.6%, will fall below 7% by the end of 2014. Recapping back to Carney’s first inflation hearing, he did state that the bank would not look at raising rates until the unemployment falls to 7%. However this time round, the governor went on to say that even when the unemployment rate falls below 7%, it does not automatically trigger a hike in rates.
Overall, what to take from this report is the fact that Carney has covered himself in all aspects with regards to the rate guidance and a non-committal approach. GBP has gained against all major currencies on the back of this event, given the upgrade in GDP estimates and prompting of speculation for earlier hikes in interest rates than originally anticipated.
Going forward no real affect expected for the British importers/exporters in the short term, given the current tight range that GBP is trading in against the likes of the EUR and USD. However, with dovish sentiment coming from Washington and a rate cut in Europe, the Pound could march on against major peers into the end of the year.
Ikenna Chigbo is a currency consultant at Global Reach Partners