In the September MPC minutes, a majority of Committee members expected to support a further cut in the bank rate to its effective lower bound (of close to, but a little above, zero) at one of its remaining meetings this year if the outlook is judged to be broadly consistent with the August Report projections. However, the outlook has altered, in two main ways.
First, last week the Office for National Statistics announced that UK GDP growth expanded 0.5% qoq in the third quarter 2016, much higher than the 0.1% qoq growth the BoE had expected in August. While the MPC is unlikely to draw any inference from the strong third-quarter GDP figures for the medium-term growth outlook, it will almost certainly be enough to warrant postponing a cut.
Second, sterling has depreciated further, particularly around the time of the Conservative Party conference in early October, with the crystallization of the date by which Article 50 will be triggered by end-March 2017 and the news that the UK government will prioritize restrictions on free movement over access to the Single Market. As a result of the fall in sterling, the BoE will have to revise up its forecasts over the entire forecast – and a bigger overshoot of the target. Speaking to the House of Lords Economic Affairs Committee last week, BOE Governor Carney said “There are limits to the MPC's willingness to look through an overshoot in inflation”.
Ratings agency S&P said on Wednesday that sterling was now undervalued by as much as 15%, but that it will stay around its current levels for some time, with the BoE likely to look past a rise of past its 2% target in order to focus on mid-term growth, and therefore to keep accommodative.
Sterling has already climbed this week, boosted on Monday by news that Bank of England Governor Mark Carney will extend his tenure to 2019. But we expect further GBP/USD rise after on-hold BOE decision today.
We stay GBP/USD long at 1.2255 and in our position the risk on this position has lowered slightly.
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