GBP/USD falls as BOE cuts inflation forecasts

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.