Mark Carney did express some concerns about the economy and stressed that monetary policy in the UK would remain accommodative. Well, the recent round of top tier figures came out below expectations, and allows the Bank to maintain lower rates for longer.
After the enhanced forward guidance, the pound rallied against its peers and reached a 4 year high against the dollar. The steam has left the rally, and this is probably a positive development for the UK economy.
Key data:
- UK headline CPI remained only one month at the 2% target and dropped to 1.9%. Also Core CPI fell short. While Britain is far from feeling the deflation fear that looms over the euro-zone, lower inflation allows for lower rate in the basic central bank text book.
- Higher unemployment: Carney and many others were surprised by the quick drop in unemployment, that put pressure for a rate hike. Indeed, the Inflation Report consisted of a hint to raise rates sooner rather than later: Q2 2015 instead of 2016. While an unemployment rate of 7% could certainly be reached in the next report (that is for the month of January), the current bump up to 7.2% probably warrants more caution.
- Lower sterling: The strength of sterling was mentioned in the inflation report. A too strong pound would limit growth in exports, which are needed to balance the recovery. The housing sector left all other sectors behind in the growth. A weaker pound, which is the result of weaker data, would help broaden the recovery.
A steadier recovery and lower interest rates for longer are probably a better path for the UK .
Regarding the pound, this pound doesn’t mean a fall in value, but an opportunity to consolidate after the relatively wild moves we have seen lately.
There still is another important UK release later this week: retail sales. For more events, technical lines and analysis, see the Pound USD forecast.
