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Bank of England: what to expect?

FX BAZOOKA analyst Kira Iukhtenko

The Bank of England has started a two-day January policy meeting on Wednesday. The results are to be announced at 12:00 GMT on Thursday. Despite the faster than expected Britain’s economic recovery over the recent months, the central bank is widely expected to leave QE and interest rates on hold.

Let me remind you that in August Mr. Carney announced the policy of ‘forward guidance’, pledging to keep the BOE’s interest rate at a record low of 0.5% until the UK unemployment falls to at least 7%. The idea was to stimulate domestic spending and borrowing by informing people that the rates will stay low for a prolonged time period. However, the UK economy unexpectedly gathered pace in the second half of 2013, signaling the unemployment target could be reached much earlier than the government initially predicted. 

The markets are now aggressively trying to guess the time when a rate hike could happen. Do we need to expect higher rates in the year 2014? I don’t think so. The British government needs time to see the recovery has become truly sustainable. With the inflation below the 2% target the chances for a rate hike in the coming year remain low.

Societe Generale economists expect the BoE to lower its unemployment threshold from 7% to 6.5% when it presents new forecasts in February and reaffirm its commitment to keeping rates low until that new goal is met.


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