More dovish BoE QIR supports delayed rate hike expectations – BTMU

FXStreet (Barcelona) - According to Lee Hardman, Currency Analyst at Bank of Tokyo-Mitsubishi UFJ, the BoE’s Inflation report has signalled a more dovish outlook for monetary policy which has lowered further short rates in the UK.

Key Quotes

“The pound has weakened modestly following the release today of the Bank of England’s latest Quarterly Inflation Report.”

“The implied yield on the December 2015 Short Sterling futures contract has declined by around 0.07 percentage point to 1.05% as market contuse to push back BoE monetary tightening expectations.”

“The first rate hike is now not fully expected until the end of next year with the key policy rate expected to increase only very gradually to around 2.00% by the end of the MPC’s forecast horizon in late 2017.”

“The main change in the BoE’s projections is that the near-term outlook for inflation has been lowered materially compared to the projections from August. The modal projections for inflation in Q1 2015 and Q4 2015 were lowered from 1.90% and 1.70% to 1.02% and 1.43% respectively based on market interest rate expectations.”

“It is now more likely that the BoE will not begin to raise rates until at least August of next year. The BoE appears to have surrendered its position to the Fed as the first major central bank likely to begin raising rates which should continue to weigh on cable in the year ahead. However, we still expect the pound to strengthen further against the euro and yen. The BoE still remains on course to begin raising rates next year in contrast to the BoJ and ECB who will be easing monetary policy further. The ongoing relative outperformance of the UK economy, which is expected by the BoE, should also continue to provide support for the pound”