BoE Policy Decision- GBP Picks Up But Central Bank Warns of Slumping Q2 GDP

In a quiet economic night, the BoE policy decisions were disappointing. With unexpectedly weak numbers, the Bank of England’s Monetary Policy Committee (MPC) has yet again admitted that its decision to continue to buy large quantities of government bonds is not working. It has failed to make the kind of convincing argument that it made during its last attempts to ease credit conditions.

And with the economy facing a gruelling three months, the central bank may yet lose control of the situation and possibly end up having to tighten its grip on monetary policy. In any case, these kinds of late economic decisions are not good for the country’s financial stability. But, at least, there are signs that things may begin to improve in the near future.

The inflation outlook looks dim for the coming months but the central bank believes that the price pressures will start to be down. It has also taken note of a number of industry indicators suggesting that the economic sector is starting to feel the effects of the slump in commodity prices. After the disastrous results of this summer, it would be prudent to remain patient and see what the effect of the recent developments on manufacturing will be.

When the central bank does decide to tighten the purse strings, it will probably take the form of increasing the base rate. This could result in a widening of the current account deficit as the dollar will appreciate against the pound. In addition, there will be capital outflows that will raise pressures on the currency exchange rate. At the same time, lower energy prices could result in tighter credit conditions that could prove more challenging to manage.

Sterling will likely experience a mild rebound from the losses suffered by the pound following the Bank of England’s rate decision. Already, it seems that the weak economic outlook means that there are some problems in dealing with inflationary pressures. Butan improvement in the UK’s export performance looks possible with the recovery of the euro zone and China.

Indeed, GBP/USD may experience some support but the recovery is still likely to be gradual. However, in the light of the failure of the central bank to dispel uncertainty, we would argue that it would be unwise to wait too long before taking appropriate action.

Following the announcement of its decision, the US Federal Reserve began the first of two separate meetings in which it was expected to discuss the outlook for the US economy. Of course, the U.S. central bank is not a direct competitor to the Bank of England. However, in terms of the growth outlook, the Fed should pay attention to the inflation dynamics in the U.S.

The second and third of its four-day meeting is scheduled for next month but the pace of the discussion in future meetings may be affected by the outlook of the U.S. Economy. If the Federal Reserve increases its rates, it is likely to increase them faster than the Bank of England has previously indicated.

As such, it is hard to see how the two central banks can agree on anything other than an accommodation for the US economy. Given the concern about inflation in the U.S., and particularly in the energy sector, the Federal Reserve is more likely to discuss matters of fiscal policy rather than monetary policy.

In fact, the Bank of England has already acknowledged that it has been facing some issues and that an easing policy for the U.K. will be on the cards in the coming months. Accordingly, the central bank may decide to continue its current range of quantitative easing measures while waiting for better news from the U.S. economy.

It will be interesting to see if the U.S. Federal Reserve can hit the ball out of the park. In the U.S., the first step towards improving the outlook for the economy has been made in the form of the Moody’s downgrade of the country’s long-term issuer credit rating. However, there are doubts about whether the Fed will be able to sustain the current stimulus package.