Looking ahead to the Bank of England Base rate decision on 9th October

Looking ahead to the Bank of England Base rate decision on 9th October

By: Darryl Frankfort | Where To Trade | On:7-10-2014 10:23
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Key Highlights

  • GBPUSD has shown some weakness
  • A simulative monetary stance met Inflation targets
  • Unemployment rate targets surpassed
  • Recovering Economy likely to trigger a rate hike
  • Productivity rate still below pre-crisis levels
  • Monetary policy now aimed at a recovery in  productivity

GBPUSD 

The Sterling has shown some weakness against the USD in the recent past, this can be attributed to the strengthening of the US economy and the recent speculation about the Scottish vote. Overall however, the GBPUSD has failed to break below the 1.5950 level and has met very strong buying pressures near this psychological level.  It remains that without any major fundamental news, we are unlikely to slide below his level.

This coming Thursday, the Bank of England will announce its interest rate decision. The decision itself and the statement that accompanies the release will give us crucial clues into how the bank perceives the economy and if there are any significant changes in their outlook for the economy.  A dovish sentiment will cause the bears to have more momentum against the bulls. We are likely to get a sharp bullish spike if the rates are to be revised upward.

The Bank of England is maintaining a very supportive monetary policy whereby it is maintaining a 375bn pounds asset purchasing program. Through this facility and low interest rates, the bank met its inflation targets in the last quarter of 2013 year where inflation gave a reading of 1.8%.

 Though the markets expected a rate hike to occur at this time the bank revised it earlier stance on inflation and said that the CPI as not an end in itself, rates would likely be increased when the unemployment rate fell below the 7% target. Currently the unemployment rate in the United Kingdom has fallen from 7.7% in the fourth quarter of 2013 to 6.9% in the first quarter on this year and is currently at 6.2%. We have been well below the 7% for two quarters target yet we have not had any increase in rate hike.

Mark Carney the Bank of England’s governor has indicated that we are getting closer to a rate hike and expectations are high that MPC will review the monetary policy. The GDP growth in the second quarter showed significant improvement over the reading in the first quarter at 0.9% versus 0.7% growth rate. Overall the UK economy is recovering. The bank has sited that the rate increase is highly dependent on the productivity growth. Currently even though the UK has printed stronger GDP figures, acceptable inflation numbers and the unemployment is well within the banks a target, the productivity growth is below the pre-crisis levels. The bank has attributes its perceived slack in the economy on the lack of productivity growth. The bank is of the view that there is “spare capacity” that can be absorbed in the economy before bank rates are raised. Productivity in the UK has stagnated since the Crisis.

index chart UK

 

Wrap up

The BOE has been able to meet all its medium term targets with inflation, and unemployment. The rate hike has however been tied with the increase in productivity. This is despite the fact that the bank has no working forecast for when the turn in productivity will occur. There is also no explanation available for the loss in productivity growth and economies are struggling to find a credible theory.

 Given that productivity growth has not picked up we anticipate that there will be no significant change in policy on Thursday and that the Bank rate will remain intact. Given the extra volatility that the GBP has during such announcements a cautious approach will be to pause trading until the excess volatility subsides.

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