Early this afternoon, the BoE will announce its key rate that should remain unchanged at 0.25%. Markets estimate that rates should only increase by early 2018.
For the time being, the British Central Bank is largely enjoying a weak pound in the wake of the Brexit vote. The economic collapse predicted after the referendum has not materialised and fundamental data are correct. Inflation is at 2.6%, growth at 1.7% (annualized) and unemployment rate keeps on declining, now at 4.5%.
The pound is getting stronger against the greenback but is weakening against the single currency. Indeed, Trump was unable to deliver what he promised and the Fed fears to increase rates. On the ECB side, markets estimate that the monetary policy divergence between the US and the Eurozone should now narrow down and that European policymakers should increase rates in the late part of this year. Current pounds levels are still providing the BoE with a window of opportunity to raise rates and drive growth.
In addition, the BoE is still targeting £435 billion in its asset purchase program and it may soon be the time to reduce the flow of liquidity the BoE injects in the market. By now, the amount injected has been of £375 billion – around 25% of the annual UK GDP -. Current economic development may definitely be a great moment for the British institution to act towards a monetary policy normalization.
By Yann Quelenn