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The Bank of England MPC member Kristin Forbes said that inflation will likely overshoot its 2 percent target, maybe sharply, over the next couple of years, adding that the feed-through of inflation from the GBP exchange rate is crucial in determining where inflation heads. She also said the UK output gap is largely closed.
These remarks leave the impression that she might not support further monetary policy easing at the November MPC meeting, the more so as she believes that the economy displayed a greater momentum going into the ‘Brexit’ vote than the MPC previously thought.
That said, remarks by BoE Governor Mark Carney, emphasising the intention to overlook the potential inflation overshoot in a dash-for-growth bid, suggest that the door remains open for a November rate cut, although such a decision is unlikely to be unanimous.
Temporary respite for GBP may be seen from Forbes’ hawkish remarks as well as from Carney’s statement stressing that the BoE isn’t indifferent to the level of GBP, but this will only be short-lived. The underlying sentiment in the currency remains bearish, and a move to 1.2000 on cable in the short-term remains on the cards.
The next key event for the currency is LCJ Lord Thomas’ judicial review, due Monday, on whether or not there ought to be a parliamentary vote on the UK’s decision to trigger ‘Article 50’ of the Lisbon Treaty.
Meanwhile, the UK 10-year gilt yields touched to the highest since Brexit vote in June as weakness in the British pound boosted inflation expectations. The yield on the benchmark 10-year gilts rose 8 basis points to 1.174 percent. The FTSE 100 traded 0.74 percent lower at 6,961.90 by 10:00 GMT.
