Pound Australian Dollar Exchange Rate Extends Gains Ahead of BoE Vote

  • Pound Australian Dollar Exchange Rate Extends Gains Ahead of BoE Vote

Pound Australian Dollar Exchange Rate Extends Gains Ahead of BoE Vote

The Bank's Monetary Policy Committee (MPC) voted 6-2 to leave interest rates unchanged at 0.25% and actually increased the total amount of cash it is electronically printing to support bank lending.

Matthew Brittain, investment analyst at Sanlam UK, said: "This marginally more dovish sentiment has no doubt been helped by the departure of long-time hawk Kristin Forbes, and puts the BoE firmly back on track to its "slow and steady" normalisation approach".

The markets believe that an interest rate hike is very unlikely but to what extent dissent is brewing within the Monetary Policy Committee (MPC) over tightening monetary policy will be under the spotlight.

The bank also downgraded its forecast for United Kingdom economic growth for 2017 from 1.9% to 1.7%, following disappointing GDP growth in the first and second quarters of this year, of 0.2% and 0.3% respectively.

The irony is that some of this money has come courtesy of the Bank of England, which lent the High Street banks £100bn in super-cheap money last August to combat the perceived risks to the economy of the European Union referendum vote.

Prime Minister Theresa May has come under increasing pressure from lawmakers to end a below-inflation one per cent cap on public sector pay rises that has been in place since 2013 as part of efforts to cut government spending. "The chances of a 2017 rate hike now look dead and buried", he added.

However, the central bank also sought to send a hawkish message that a rate rise could still be coming sooner than markets now expect.

Against the euro, sterling GBPEUR, -0.8070% slid to €1.1073, trading around its lowest level since November. "We think the dollar is likely to appreciate against the yen over the rest of the year, due to rising inflation in Japan".

Bank governor Mark Carney said the United Kingdom is "in the teeth of it right now", but added that the Bank expected growth to accelerate if a "smooth" Brexit transition is achieved. Some will point to this as evidence that Brexit is taking its toll on the United Kingdom economy. Against the USA dollar it hit lows of $1.3113. However, the MPC predicted "significant upward pressure" from import prices in the coming months and for inflation to peak at around 3 percent in October. However, it has signalled the end of the Term Funding Scheme, created to make cheap money available to banks. The MPC now sees growth at 1.6 percent in 2018, down from 1.7 percent, while GDP in 2019 remains at 1.8 percent.

Average wage growth has been weak since May, falling below the rate of inflation, and the Bank has now downgraded its nominal wage growth forecast for 2018 to 3 per cent, down from 3.5 per cent previously. Wage growth was also revised down, with the bank now expecting wages to contract this year by 0.5% on an inflation-adjusted basis.

The latest Inflation Report from the Bank of England made for some glum reading for sterling bulls, although the weakening in the pound helped to propel the FTSE 100 to its highest level since 26 July.