BOE Meeting Minutes Push Off Interest Rate Expectations

Here's more from the central bank:

Case Against Hiking Rates:

Follow us

"The risk that increased inflation expectations might become entrenched in wage and price-setting was material, but there was no evidence yet of that crystallising. Wage growth remained low. It was still too early to know whether the slowdown in growth towards the end of 2010 had been temporary, or whether the weakness in the contemporary indicators of household spending heralded a more protracted weakness in consumption growth. But the news over the month about demand and activity had probably been to the downside. An increase in Bank Rate in current circumstances could adversely affect consumer confidence, leading to an exaggerated impact on spending."

On Inflation:

On the upside, the key risk was that the period of elevated inflation could persist for longer than
the Committee expected if there were further pass-through from the past depreciation of sterling; if externally generated inflation pressures continued to raise CPI inflation; or if expectations of higher
future inflation became entrenched, leading households and businesses to set higher wages and prices. The price of oil had risen further during the month, but this was likely to have been influenced by temporary supply disruptions. CPI inflation had fallen sharply in March, but until more detail became
available it was hard to know how to interpret this. In the light of recent developments in the prices of energy, imported commodities and other goods, the near-term path of CPI inflation was likely to be higher than in the February Inflation Report. And there remained a significant risk that inflation would exceed 5% in the near term.

Following the news we see that the immediate impact is pushing off the next BOE interest rate increase.

Here are some analysts/economists from today's Bloomberg's article:

"Investors have pushed back bets on the first interest-rate increase to November, according to data compiled by Tullett Prebon Plc. A quarter-point rate rise by July had been priced in as recently as April 8, according to forward contracts on the sterling overnight interbank average, or Sonia.

"The data has been fairly mixed over the past month and we don't see the recovery in the first quarter being as strong as was previously expected,' said George Buckley, an economist at Deutsche Bank AG in London. "We've got August as the first hike."

Citigroup economist Michael Saunders pushed back his forecast for the first rate increase and sees less policy tightening this year. He expects the first quarter-point increase in "June- August," having previously forecast a move in May or June."

While the GBP managed to recoup its losses against the USD, it fell sharply against the EUR - sliding from 0.8780 to 0.8870.

That reversed more than 61.8% of the downswing we had seen over the previous 5 sessions as concerns about Euro-zone periphery sovereign debt re-surfaced. The EUR - a stronger performer all around - now has the clear lead in interest rate differentials as even the BOE, with inflation at almost double their target, seem reluctant to tighten policy.

This is an important Minutes and will set the tone for the GBP in the next month. If the stream of UK economic data continues to underperform then the EUR/GBP pair has a strong shot of pushing past the 0.8920 level.

Nick Nasad
Chief Market Analyst
FXTimes