GBP: inflation report and Carney’s speech
GBP/USD is now trading above $1.6500.
- Gradual path of rate rises likely to be appropriate to eliminate slack over 2-3 years. First rate rise is seen around Q2 2015 and the rates will be above 2% by Q1 2017.
- Growth forecast: 2014 GDP +3.4% and 2015 +2.7%, 2016 +2.8%.
- CPI to hit trough of 1.7% in March.
- But revised down forecasts of productivity growth.
The Bank of England’s Governor Carney:
- Recovery has gained momentum due to revival in confidence and credit, but isn’t sustainable yet. Productivity growth is disappointing. Weak global demand & pound strength will dampen exports.
- The policy of forward guidance has worked as expected, it helps to anchor inflation.
- Stimulus will need to be exceptional for some time.
- The BoE was surprised by the rate of recovery and falling unemployment.
- There are growing downside risks in emerging markets.
- Introduced the second phase of forward guidance:
Sees scope for economy to absorb more spare capacity before MPC raises rates even after unemployment falls to 7%. Increases in interest rate should be limited. If and when the time comes when the economy will be sustainable to cope with the increase in interest rates, it will happen gradually. The MPC is publishing 18 new indicators – a much more detailed economic forecast.