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Bank of England keeps interest rate unchanged, likely to adopt hawkish tone in future

The Bank of England kept its monetary policy unchanged today during the meeting, keeping the Bank Rate at 0.75 percent, as was widely anticipated. The members of the Monetary Policy Committee unanimously voted for the rate to be unchanged. The Bond Purchase Program was also kept unchanged.

The economic projections were little changed, with GDP growth nudged down modestly for 2019, while expectations for inflation at the end of the 2 year forecast horizon continued to hint a modest overshoot of the inflation target, though the point at which inflation was widely deemed to return to target was pushed out from fourth quarter 2020 in the August Inflation Report to the third quarter 2021, noted Lloyds Bank in a research report.

The latest set of economic projections conditioned on a market interest rate curve above that used in August, and inflation seen continuing to stay above target for longer, implies that the central bank are implicitly endorsing a slightly more rapid rate of interest hikes. This implies a little over 2 quarter-point rises in Bank Rate are needed to bring inflation back towards its targets by the end of 2020.

Furthermore, it is worth noting that the U.K. central bank’s latest set of forecasts do not include the recent changes to fiscal policy, contained in the Autumn Budget. The minutes that accompanied policy decision of today implied that the MPC might assess the implications of these at its next meeting, with the February Inflation Report being the first point at which the alterations are officially incorporated into their forecasts.

“However, faced with a reduced fiscal headwind, the Committee is likely to judge that these changes are likely to add further upside to the growth and inflation outlook. This suggests that there is scope for the Bank of England to adopt a more-hawkish tone in the future”, stated Lloyds Bank.

For now, Brexit concerns continued to be a key feature for the central bank’s communication, which overall drew a comparatively cautious tone from Governor Carney at the press conference. Moreover, the BoE highlighted that the risks to the global backdrop had increased since August.

“Nevertheless, in the event that the Brexit negotiations progress in line with the BoE’s central view, we believe there is scope for the BoE’s tone to turn more hawkish in response to developments in the domestic economy. However, this turn is unlikely to occur until the UK’s future relationship with the EU becomes clearer”, added Lloyds Bank.

At 17:00 GMT the FxWirePro's Hourly Strength Index of British Pound was highly bullish at 100.974, while the FxWirePro's Hourly Strength Index of US Dollar was highly bearish at -134.96. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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