BoE’s Forward Guidance Cheered by GBP
City Index August 7, 2013 6:24 PM
<p>Carney’s BoE introduced a 7% unemployment threshold, implying that monetary policy will not be tightened unless the ILO measure of unemployment nears 7% from its […]</p>
Carney’s BoE introduced a 7% unemployment threshold, implying that monetary policy will not be tightened unless the ILO measure of unemployment nears 7% from its current level of 7.8%.
In an effort to signal that it will not undermine price stability, the BoE maintained its inflation target unchanged at 2.0% and issued 3 knock-out conditions, which would invalidate the guidance in the event that 1) CPI forecasts exceed 2.5% in 18-24 months; 2) if inflation expectations are disanchored; and 3) if monetary policy poses a threat to financial stability.
FX Traders Focus on Growth
Despite the BoE’s revolutionary employment threshold implying rates won’t be raised for another 2 years, sterling rallies as traders highlight the improved growth implications of rates remaining low rather than focusing on the yield implication of the currency.
The introduction of forward guidance signaling low rates for another 2 years was generally discounted by bond, FX and equities but these markets react differently and so does their Buy-the-rumour & sell-the-fact reaction function. Perhaps some equity traders were not happy with the 3 knock-out clauses that would invalidate the 7% unemployment guidance.
With the BoE raising its 2013 and 2014 GDP forecasts to 1.5% from 1.2% and to 2.7% from 1.9% respectively, the central bank may get the best of both worlds, keeping rates low for at least 2 more years, without being constrained by a hard inflation target, which now becomes in function of the BoE forecast rather than the actual data.
And since UK economic data has revealed the strongest set of macro figures over the past 2 months under the £375 in asset purchases, maintaining monetary policy status quo is expected to favour the growth implications of the dual-mandated BOE policy.
Markets did not need Carney to tell them interest rates will not be raised before 2014. Although today’s report implies rates won’t be raised before 2015, gilt yields could well begin a gradual ascent as long as jobless figures chart their 2-year path towards 7% unemployment rate. GBPUSD turns its sights towards $1.5630 as the next immediate target, followed by $1.5720 before end of August. Support above 1.5050 is anticipated to hold for now.
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