Bank of England Hits a 'Temporary Soft Patch'

Today's main event is the BoE's rate decision, however, and whilst the central bank is not expected to raise interest rates on this occasion there is the possibility that the statement and accompanying press conference could knock the pound up or down.

The Bank of England has said the United Kingdom economy has hit a "temporary soft patch" as it kept interest rates on hold at 0.5%. That was in line with forecasts from economists polled by Reuters in the past week.

Currently, the Bank of England rate stands at 0,5% and is expected to rise to 0,75%, probably later this summer rather than now. It was down 0.2% at $1.3527 as of 12:58 pm in London.

According to Reuters, "Britain's economy grew more slowly than most of its peers a year ago after a Brexit-driven jump in inflation hit consumer spending power and some businesses delayed long-term investment". Surveys have suggested little rebound last month. For now, most policymakers wanted to wait to be sure that the weakness passes quickly.

"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. Considering all the speculation that has been happening over the last few months, with a rate rise nearly seeming a foregone conclusion at one point, this is certainly an interesting turn of events.

But the bank's caution is not expected to last indefinitely. But this was due to a faster fading of the impact of the plunge in sterling on the price of imports, and that domestic inflation pressures continued to rise.

A similar market measure, short sterling interest rate futures FSSZ8 priced in the lowest chance of a rate rise this year since January, after one of the biggest reductions in expectations this year.

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Around the same time, Governor Mark Carney also had signaled in an interview to the BBC that the uncertainty around the Brexit negotiations could lead the MPC to delay raising interest rates.

Markets no longer expect the Bank to raise rates this year after it cut its economic growth, inflation and wage growth forecasts. The group's chief executive Carolyn McCall noted that the group had "started the year well both on and off screen".

It also forecast that the unemployment rate would fall further, to 4% by 2020, the Bank's lowest forecast since the financial crisis.

However in order for inflation to get back to the government's target of two per cent, the MPC stuck to its previous recommendation that three interest rate hikes of 0.25 per cent each would be implemented over the next three years, though these need not be imminent.

He added: 'However, the Bank is also anxious that the underlying pace of economic growth may have in fact waned so far this year. The current backdrop of global growth is the most synchronised it has been for nearly ten years and the subsequent spill over from this will inevitably affect the United Kingdom economy.

As anticipation mounted ahead of the Bank of England's (BoE) May policy announcement the Pound to Euro (GBP/EUR) exchange rate found some limited support. These projections are conditioned on a gently rising path for Bank Rate over the next three years. What do you think the BOE will do?

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