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The Bank of England raised its growth forecasts, but stressed that the recovery would be weak. Q2 growth is expected to stand at 0.5% and yearly growth will reach 2% in 2 years time. This is the last inflation report by outgoing governor Mervyn King. He accompanies the report with a press conference.

GBP/USD was trading at around 1.5240 before the publication, bouncing from earlier lows. It fell in the immediate  aftermath  of the publication, but recovered quickly. Update: it is now trading higher than before the publication.

Inflation is expected to peak in the third quarter, but isn’t expected to drop below 2% in the next 2 years. King also says it is not the time to be complacent, despite the current forecasts that assume the financial crisis impact is gradually fading.

All in all, the forecasts are more positive than in the previous report: stronger growth and lower inflation. King added that “recovery is in sight for the UK economy”.

More from the King: monetary policy continues to be a hard balancing act, and it cannot solve all problems. There is lots of stimulus at the moment.

The main risks come from the euro-zone, even though the BOE forecasts no more contraction in the old continent during the second half of the year.

Labor productivity is expected to rise. Investors expecte interest rates to remain below 1% in the next four years.

Earlier, the UK reported better-than-expected employment numbers: the number of jobless claims dropped by 7.3K in April, and the unemployment rate for March fell to 7.8%.

For more, see the GBP/USD forecast.

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