Bank of England lowers growth outlook at inflation report

Enrique Díaz-Álvarez14/May/2015Currency Updates


Sterling’s recent rally continued on Wednesday morning with the release of impressive wage and employment growth data. Average earnings rose above forecast to a four-and-a-half year high of 2.2%, while unemployment fell yet again to just 5.5%, its lowest level since August 2008.

This rally, however, was brought to a temporary halt following the Bank of England’s relatively dovish inflation report and accompanying speech from Governor Mark Carney. The central bank revised lower its growth forecasts following weak first quarter expansion, down to 2.5% in 2015 from a 2.9% projection in February. This it appears was driven primarily by a weaker recovery in UK productivity. Inflation is expected to remain close to zero for most of the year, possibly dipping into negative as oil prices continue to weigh on price growth. However, Carney sees no evidence of delayed spending, despite the consumer price index falling to a record low of zero in February. Critically, the central bank appears comfortable with markets pricing-in a mid-2016 interest rate hike, meaning rates could remain unchanged for the foreseeable future. The Inflation Report also suggests that rates will rise gradually, at least through to mid-2018.

The Bank of England’s cautiousness will likely cause markets to push their hike forecasts further into the future. However, we are sticking with our call for a first-quarter hike in 2016 given yesterday morning’s strong labour report. We think it is unlikely that rates can remain at their current rock bottom levels for more than a year.

A volatile days trading for Sterling ended with the UK currency hitting a fresh six month high on the Dollar after poor retail sales in the US. The Pound ended trading 0.5% higher.


The Euro soared towards a three month high versus Greenback, climbing by 1% following contrasting data in the two economies.

Despite undershooting expectations, growth in the Eurozone expanded in the first quarter of the year, remarkably outpacing both the UK and US economies. First quarter economic expansion of 0.4% in the Euro-area caused the economy to grow by 1% on a year previous. A breakdown of the data suggests that the recovery is becoming more widespread. France and Italy both returned to growth, with the French economy smashing expectations to grow 0.6%. Cheaper oil and improved performance following the launch of quantitative easing appears to be the driving force behind this, with consumption making a big contribution towards overall growth so far in 2015. Disappointingly, however, Greece’s economy slipped back into recession with the country still locked in negotiations with its creditors over the country’s bailout terms. In a very busy morning in the Eurozone, inflation in Germany was flat month on month, climbing above forecast by 0.5% on an annualised basis.

A public holiday to mark Ascension Day in many of the European country’s means today will be a relatively quiet days trading for the Euro, barring any external shocks.


The Dollar continued to slump against its major peers once again on Thursday, enhanced by strong data elsewhere and weak domestic sales growth. The US Dollar Index ended trading 0.8% lower.

The US economy was dealt another blow on Wednesday afternoon from disappointing retail sales figures. Sales at retail stores were flat in April, with US households cutting back on purchases of big ticket items such as automobiles. Despite March’s figures being revised upwards from 0.9% expansion to 1.1% growth, this was not enough to offset the downbeat tone of the report. Retail sales continue to trend downwards, having been affected heavily at the start of the year, following a mixture of bad weather and a strong Dollar. Excluding automobiles, sales also disappointed at just 0.1%, well down on forecasts.

A number of releases in the US this afternoon will likely lead to moderate Dollar volatility, including jobless claims and the producer price index at 1.30pm GMT.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.