Week in FX Europe - BoE Shifting The Goal Posts?

Includes: FXB, FXE
by: Dean Popplewell

Shifting the BoE job threshold of +7% seems to have already begun. It started this week following the U.K. inflation report and has since been backed by BoE member Weale. He is the only policymaker to vote against the terms of the Bank's forward guidance plan launched in the summer. He has indicated that it's very possible that the "Old Lady" may keep their benchmark-lending rate at +0.5% even when unemployment happens to fall below the current desired threshold.

Like any other Central Bank, the BoE cannot ignore increases in inflation expectations, which in the U.K. have picked up. British policy makers may need to raise interest rates before all spare capacity in the economy is actually used up. Inflation in the U.K. has been running above the Bank's desired target of +2% for many years. Why? This has occurred mostly on the back of policymakers concentrating on getting the U.K. economy kick started by any means possible. They have been doing the same as Fed and the BoJ, applying quantitative easing- slashing interest rates and buying government bonds - keeping cash cheap and plentiful.

Last month inflation in the U.K. happened to fall sharply to +2.2%, which has allowed the BoE to revise down its future forecasts this week for CPI. As it tries to support Britain's economic recovery, the BoE will only consider raising interest rates from their record low of +0.5% once unemployment falls below +7% threshold. This percentage level was chosen as a "simple" measure for the public, so they could understand. However, the timing of raising rates is still an unknown entity.

Everything is still data dependent and the market is currently speculating on a 2015 rate move. BoE policy makers could easily shift the +7% threshold lower if Governor Carney and company does not believe a rate hike is warranted. U.K. monthly employment numbers will continue to be keenly watched.

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