BoE Forward Guidance Announcement is Less Dovish Than Expected
As we can see from the below table, the course of the Inflation Report press briefing proved volatile for GBP/EUR:
Ross Walker at RBS says:
"The BoE's forward guidance is more nuanced and qualified than expected and therefore less dovish than expected. As expected, the unemployment rate was adopted as the 'intermediate threshold', but the 7% rate and other conditionality 'knockouts' relating to CPI inflation and broader financial stability considerations leave the overall impression of a less dovish policy signal than expected.
"In terms of time-scale, much will hinge on the outlook for the unemployment rate, where the MPC's central projection is for a relatively slow-paced decline given the growth outlook being signalled by the business surveys. Forward guidance is less dovish in the detail.
The Euro has held up relatively well today as strong German industrial production, well above expectations at 2.4% m/m and 2.0%y/y and following yesterday’s encouraging factory orders combined with the BoE’s announcement have supported the European growth outlook.
In addition, EUR is caught between a broadly stronger USD; but a rallying GBP.
The details of forward guidance
The Bank of England has said they will focus on a 7% unemployment threshold. Only once this level is reached would the Bank consider raising interest rates.
However, this target would no longer hold if any of the following three circumstance arose:
1) if the MPC expected CPI to rise above 2.5%, 18 to 24mths ahead;
2) inflation expectations became unanchored; and
3) if there was a threat to financial stability.
However these knockouts do not equate to an immediate increase in the Bank Rate.
According to Camilla Sutton at Scotiabank forward guidance benefits will provide clarity on the trade off between inflation and growth while it reduces uncertainty
about the path of monetary policy.
It also allows the MPC to explore the scope for economic expansion without risking price or financial stability.