British pound sinks as BOE members signal unwillingness to raise rates

18 October 2017, 12:21 | Andres Norman

Growth gathering momentum, but where's the inflation?

Inflation bites in the UK as households come under price pressure

Two members of the Bank of England's Monetary Policy Committee have spoken cautiously about the prospect of a rate rise next month.

Carney noted that United Kingdom central bank's monetary policy is encouraging, and in future, United Kingdom economy could face various difficulties. The increase, which took the rate to its highest since March 2012's 3.5 percent, was anticipated in financial markets and largely due to rising prices for food and transport.

BOE deputy Governor Dave Ramsden was answering United Kingdom lawmaker's questions in a parliamentary committee, alongside new external BOE policy setting member, Silvana Tenreyro. Mark Carney, the BoE governor, has stated his opinion that an interest rate hike is forthcoming.

"Meanwhile, our pay packets have stagnated with wage growth falling behind inflation, despite United Kingdom unemployment being at a record low".

The expected rise in rates comes despite signs that the British economy is faltering - it is growing slower than any other Group of Seven industrial economy this year - and that inflation is expected to ease back down in coming months.

Bank of England governor Mark Carney told the Treasury Select Committee in Westminster this morning (17 October) that he expects United Kingdom inflation to peak at just more than 3 per cent, in the next two months.

However, the Bank's policy makers like to keep us guessing and in prepared comments to the Treasury committee of MPs this afternoon, struck an unexpectedly dovish tone that hit the pound.

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In testimony to lawmakers on Tuesday, Carney said he's "more likely than not" to have to write that letter in October or November.

This may give the Bank added confidence for raising interest rates for the first time in more than a decade before the end of the year.

However, the British pound remained lower against the dollar despite confirmation of Carney's view on inflation. He said he was not part of the majority at the last meeting who thought interest rates should head higher soon, largely because there is little evidence that inflation was boosting wages.

The latest report is in line with the forecast issued by the BoE in August, when it said it expected CPI inflation to peak at 3% in October this year.

But the BoE surprised investors last month when it said most of its rate-setters expected to increase borrowing costs in the coming months, partly because Brexit would lead to higher inflation in Britain.

"The overall tone from the testimony supports our view of a rate hike in November", said Barclays after mulling the Q&A session.



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