Bank of England leaves rates unchanged but sees stronger growth in Q3

Summary:

• Bank of England members made an unanimous decision to leave interest rates unchanged

• Growth forecast for third quarter of the year was raised to 0.5%

• Bank recognized that uncertainty related to Brexit increased since last meeting

As expected the Bank of England decided to keep main interest rate unchanged at 0.75% after delivering a rate hike in August. All 9 members of the Monetary Policy Committee voted for no change. Other monetary policy settings like the asset purchase target were also left intact.

After moving slightly higher in a knee-jerk move the GBPUSD took a modest dive to 1.3033. Source: xStation5

Minutes released along with the decision painted equivocal picture for the British pound. The UK central bankers raised their economic growth forecast for the third quarter of the year from 0.4% to 0.5% while admitting that growth was stronger than expected recently. Highlighting the better-than-expected growth is seen by some commentators as an attempt to justify the last month’s increase in borrowing costs that was subject to criticism in days following August meeting. Apart from that, BoE said that CPI inflation will likely be reduced in 2019 due to the energy price cap. However, the Bank reiterated an opinion that the ongoing tightening is likely to be needed.

On the other hand, BoE is concerned that emerging markets’ assets have become more volatility due to the rise in global trade tensions. Moreover, Brexit was also mentioned in the report. Namely, the Bank recognized that uncertainties surrounding the UK departure from the European Union have increased since August. GBPUSD moved slightly higher in a knee-jerk move following the announcement of the decision but the gain was quickly erased and the pair is trading lower.

GBPUSD moved to the lower bound of the long term resistance zone recently. The area is underpinned by the 23.6% Fibo level of the last major downward impulse. Do notice that the pair has reversed from the same area at the turn of August and September. If the pair is to finish today’s trading where it is now a doji candlestick would be painted signalling a possible reversal. Source: xStation5

In general the statement can be viewed as more hawkish than dovish but it should not distract investors from the fact that we may have to wait some time for another rate hike. Bank of England is widely anticipated to stay on hold until Brexit occurs or at least sufficient agreement is reached and signed. When could the deal be signed? Certain date is not known yet as the deal draft is said to be far from completion. However, Bloomberg reported this week that the European Union and the United Kingdom authorities are planning a special summit to sign the deal. Source cited by news agency did not identified a specific date but said that it could be announced within next few days. However, the EU chief Brexit negotiator, Michel Barnier, said this week that it is “realistic” to assume that the deal between the EU and UK can be reached within next two months. Last but not least, while we cannot say with certainty how the deal will look or whether it will be reached at all there is one thing that can be viewed as clearly positive for GBP. Namely, the Bank of England Governor, Mark Carney, agreed to remain in office for another seven months after his terms ends. Having said that, Carney will serve as the Governor until January 2020 and therefore the UK will not have to cope with a shift at the Bank’s top job just after the Brexit takes places.