Bank of England holds rates, keeps option open for August hike

urrency traders had all but resigned themselves to the fact that the BoE would not raise rates at this week’s meeting, following a string of recent soft UK economic data. Policymakers acknowledged the slowdown in the UK economy, with the minutes citing greater-than-usual uncertainty over consumer demand. The bank sharply lowered its growth forecast for this year to just 1.4%, from the previous 1.8% projection. It did, however, note that this was almost entirely due to the disruption caused by the bad weather earlier in the year and that recent weakness had few implications for the outlook. It also stated that growth in the first quarter had been consistent with a ’temporary soft patch’, and that it would see how data evolved over the coming months to discern whether this weakness will persist.

The half a percent sell-off in Sterling following the meeting was instead, largely due to the material growth downgrade and the bank’s slightly toned down rhetoric over its need to hike. The sell-off in the Pound following the meeting would seem as slightly overdone. With UK inflation still comfortably above target, the Bank of England, in our view, remains committed to a tightening cycle and is keeping its options open for a hike in August. This, of course, is heavily dependent on a recovery in underlying economic conditions suggesting that the slowdown in the first quarter was nothing more than a temporary phenomenon.

US Dollar slips from multi-month highs on soft core inflation

A softer-than-expected pace of US inflation was enough to prompt some traders to dial back bets of an accelerated pace of Federal Reserve interest rate hikes yesterday. The headline rate came in, at 2.5%, its fastest pace in over a year, although the core measure fell short of consensus. The reading, which strips out volatile components, was unchanged at 2.1% after investors had eyed an increase to 2.2%.

Macroeconomic news was fairly light on the ground in the Eurozone. The Euro rose back above the 1.19 level yesterday, although this was driven almost entirely by the soft US inflation numbers. President of the European Central Bank, Mario Draghi, will be speaking in Europe this afternoon, with investors eager for clues over the future of the bank’s asset purchasing programme.