The Bank of England Turns Dovish, GBP/USD Turns Bearish

The Bank of England Turns Dovish, GBP/USD Turns Bearish

With the United Kingdom inflation decelerating toward the target more quickly than expected in February and the GDP growth slowing down sharply at the beginning of this year, it was no surprise from the Bank of England to keep the Bank rate at the unchanged level of 0.50 percent in May.

Carney defended himself against that charge, arguing that when the situation changes, the bank's policy response has to change.

Sterling fell on the news and was trading lower by 0.2% against the U.S. dollar at 1.352.

In minutes of the MPC meeting, the Bank said: "Weakness in the data for the first quarter had been consistent with a temporary soft patch, with few implications for the current degree of slack or for the outlook for the United Kingdom economy". And this is what warrants only very gradual and limited path of interest rate hikes in the UK.

Economists had previously expected two rises in 2018 after the Bank's February forecasts, when Governor Mark Carney said rates would need to rise further and faster to rein in inflation. The economy grew by just 0.1 percent quarter-on-quarter, markedly below the Bank of England's forecast of around 0.4 percent. Previously the cost of borrowing had been decided between the chancellor and the governor of the Bank. "The only people who throw that term at me are in this room", Carney told the news conference.

The Bank cut its growth forecast for the year to 1.4%, down from the forecast of 1.8% made in February.

Minutes to the meeting show the majority of rate-setters preferred to wait to raise rates to "discern whether the softness in the first quarter might persist".

More news: Explosions at police station in major city spark fears of multiple casualties

Inflation was seen dropping to 2.1 per cent in a year's time, and returning to target a year later but only if interest rates rose by 25 basis points about three times over three years, as markets expect.

Practically, this largely involves the Bank adjusting interest rates to try and keep inflation at, or as close to, a target of 2%.

Data published earlier on Thursday appeared to confirm that, showing industrial output inched up by 0.1 percent month-on-month in March, slightly below analysts' forecasts for 0.2 percent growth.

GDP growth was recorded as being just 0.1 per cent for the first three months of 2018, the lowest rate of growth since 2012 and well below forecasts.

"The Bank of England May Inflation Report says".

However, as with everything related to the British economy, much depends on the Brexit discussions.

However, Carney also noted that the "economic outlook for the United Kingdom remains clouded by Brexit uncertainty", despite an agreement on a transition deal between the country and the European Union being welcome.

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