The Bank of England released its quarterly inflation report and the picture isn’t too positive. Inflation forecasts have been downgraded significantly to 1.2% in 2014 and 1.4% in 2015 and growth prospects are also somewhat lower to 2.9% in 2015.
GBP/USD makes its way down under 1.59 and continues lower. The pair is aiming to reach support at 1.5850. The low so far is 1.5857.
Salaries
This erases previous gains that came on top of accelerated wage growth in the UK. The report indeed says there are initial tentative signs of wage growth and it sees annual real wage growth reaching 2% by the end of next year. While the squeeze on wages still isn’t over, Carney sees encouraging signs.
Higher wages are set to push CPI inflation back to target.
Inflation
Regarding inflation, the BOE also sees the inflation rate as likely to fall below 1% at some time within the next 6 months but overall it sees the 2% target as feasible within the 3 year forecasts period.
The near term CPI outlook is definitely lower than the one reported in August’s inflation report. Imported commodities and lower demand weigh on inflation. In general, disinflationary pressures are coming from abroad.
The appreciation of GBP has taken 0.75% off the CPI. Does Carney want a weaker pound?
Growth
Growth is expected to be subdued with downside risks coming from the euro-zone while the upside risks are due to come from the US.
Rates
While the BOE says it is appropriate that markets now expect easier monetary conditions than bank in August, tightening of monetary policy remains in prospect.
Rates are currently at their lower bound and they are set to help inflation get back to target.
Forecasts are based on market expectations for an initial rate hike in October 2015. The pace of rate increases is due to be gradual.
On the euro-zone
BOE governor Mark Carney says that the specter of stagnation is haunting Europe. Structural reforms are key to lifting Europe, and monetary policy cannot do the job alone.
On the other hand, Carney states that there are no confidence effects on investment that result from the euro-zone stagnation.
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