Bank of England remains in no rush to hike interest rates
11/Dec/2015 • Currency Updates•
The Bank of England released little new information in its monetary policy statement yesterday, going out of its way to make sure that its views have not changed at all since the November meeting.
As expected, interest rates were left unchanged, and the vote remained split 8-1 in favour of no hike. Policymakers remain in no hurry to hike rates despite an imminent rate increase by the Federal Reserve, with there being “no mechanical link” between the two banks’ thinking.
Rate-setters focused on the recent plunge in oil prices, which is likely to keep inflation lower for longer and, in our view, prevents the central bank from hiking until the third quarter of 2016. MPC members also highlighted a flattening out in wage growth, while warning investors against reading too much into the bank’s market projection on rates.
All in all we are exactly where we were last month, hence the subdued FX market reaction, with the Pound little changed as a result and businesses still unsure about when interest rates may start going up.
In other currency news, the Swiss National Bank maintained interest rates deep in negative territory at -0.75%, reiterating its view that the Swiss Franc is overvalued.
Major currencies in detail:
Sterling was barely moved following the BoE statement on Thursday. While the currency was sent moderately lower, these losses were quickly reversed in the afternoon, with the currency ending 0.1% lower against the USD.
Messages from the central bank yesterday were mostly in line with our expectation, although if anything slightly more dovish than anticipated. The takeaway from the market was overwhelmingly that the BoE is in no rush to tighten monetary policy.
Earlier in the day, the UK’s trade deficit widened further in October, with the deficit of goods within the EU hitting a record level. The goods deficit with the EU grew to £8.1bn, according to the Office for National Statistics, primarily driven by a relatively weak Euro hampering competitiveness of UK exports, and making imports relatively cheaper.
Consumer inflation expectations this morning will see little focus.
The Euro fell by 0.4% against the US Dollar on Thursday, although with little economic data, volatility was minimal.
ECB member Bosjan Jazbec struck a relatively dovish tone yesterday morning, claiming that the Governing Council would do everything to meet its inflation target. Meanwhile, speaking in Frankfurt, fellow ECB member Yves Mersch claimed that a “very large majority” of the ECB were against expanding its quantitative easing programme at its last meeting. Mersch suggested that the existing 60 billion Euros a month measures are enough to reach the inflation target.
The next round of the ECB’s targeted LTRO at 10:15am this morning as well as German inflation before UK markets open are both worth noting today.
The Dollar regained ground ahead of next week’s Federal Reserve meeting, ending the session 0.4% higher.
Anticipation continued to build ahead of next week’s Fed meeting. Market pricing for a December hike is now as high as 85% as there’s little to prevent the FOMC from increasing its funds rate on Thursday.
From a data perspective yesterday, initial claims for jobless benefits rose slightly more than expected last week. Claims increased by 13,000 to 282,000, with the four-week moving average marginally higher, although still strong at around 270,000. Elsewhere, cheaper oil continues to push down prices of imports into the US economy. The import price index declined by 0.4% last month, the 15th negative value in the past 17 months. Similarly, export prices also fell sharply on a month previous, down by 0.6%.
The highlight of trading today will be the latest retail sales figures in the US, set for release at 1:30pm UK time. However, this will likely take less focus than usual, given how strongly the market is already pricing in a Fed hike next week.
Rest of the world
The South African Rand was one of the worst performing currencies in the world yesterday, hitting a fresh record low following the unpopular decision to remove the country’s finance minister.
The Australian Dollar strengthened on strong jobs data, while the New Zealand Dollar rose after its central bank suggested further interest rate cuts may be off the table.
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