Bank of England Carney: Market Rate-Hike Expectations Insufficient

In its quarterly inflation report, the Bank of England lowered its GDP growth forecast for 2017 to 1.7% from 1.9% with the 2018 projection shaved to 1.6% from 1.7%.

There was no change to the 2018 inflation forecast at 2.6% with the 2019 forecast also unchanged at 2.2%.

Although there was a cut to the unemployment forecasts with the 2018 rate expected to be 4.5% from 4.7%, there was also a downgrading of expectations surrounding wages growth.

Bank of England Governor Carney refused to be drawn on when the bank could raise interest rates, although reiterated that two rate hikes over the 3-year period would probably be insufficient.

He stated that the bank assumed a smooth transition process surrounding the Brexit process, although contingency planning was well underway for all possible outcomes.

He was also optimistic surrounding the global growth outlook with stronger investment which would tend to raise equilibrium interest rates. Carney, however, still expected investment levels to be relatively weak.

Nevertheless, only a limited pick-up in growth would have significant implications for monetary policy given a lack of spare capacity.

There were also comments that trends in the business and exporter sector would have a greater impact on the path of interest rates than households.

Carney looked to play down the risks posed by credit growth, although he reiterated that lenders needed to avoid easing underwriting standards.

Sterling continued to lose ground during Carney’s press conference, with markets still judging that the bank was less confident surrounding the outlook.

EUR/GBP also gained support from stop-loss buying above 0.9000 with a move to around 0.9035 as GBP/USD retreated to lows below 1.3130.

Tim is a contributing author to EconomicCalendar.com. He is an economist and has been involved in financial markets for over 20 years as an analyst. He specialises in global economic trends, macro policy and central banks. Extensive knowledge, experience and data mining is used to anticipate trends in equities, bonds and forex with a contrarian slant. He is a graduate of the University of York with a degree in Economics/Econometrics.