EUR/GBP Ticks Higher Ahead of BoE Rate Decision


The central bank noted that CPI fell to a lower rate than expected in March, of 2.5% year over year, and now expects CPI inflation to fall back slightly more quickly than in forecast in February.

Seven monetary policy committee members voted to hold rates at 0.5 per cent at the May meeting, while two wanted an immediate quarter-point rise.

"Governor Carney didn't want to pull the rug from under the slope of the money market curve and, hence, the value of sterling".

The BoE thinks that unless interest rates rise, even modest economic growth of about 1.5 per cent a year risks stoking excess inflation, due to Britain's long-standing weak productivity growth and reduced immigration as a result of Brexit. And it would have taken borrowing rates to their highest since nearly nine years ago, when the central bank was slashing rates to help the economy through its deepest recession since World War II following the global financial crisis.

Professor Peter Urwin, director of the Centre for Employment Research, said the decision to hold rates down had not been a foregone conclusion. "However what it will depend on is the degree to which the economy recovers from the Q1 dip and how it compares to the Bank of England's forecasts over the rest of the year".

Five-year British government bond yields GB5YT=RR, sensitive to expectations for BoE rates, slid nearly seven basis points after the decision to approach a three month low, and last stood at 1.13 percent, down four basis points on the day.

Tepid growth was one of the reasons why the bank opted against hiking rates at this month's meeting, as Carney had indicated just three months ago was likely. However, much will depend on whether Carney and the Bank's staff attribute the recent weakness of the economy to poor weather in the United Kingdom earlier this year or regard it as a fundamental problem. Rate futures showed less than a 50 percent chance of a hike in August, the next time the BoE updates its forecasts. That matters as the rate-setting body's primary mission is get inflation close to 2 percent. "This is not an economy that is growing at robust rates", but growth in demand was still likely to outstrip growth in supply over the Bank's rate horizon.

The majority of rate-setters preferred to wait to raise rates to "discern whether the softness in the first quarter might persist". Instead, the bank kept its main interest rate unchanged at 0.5 percent Thursday, blaming weaker-than-expected growth and inflation data.

The preliminary estimate of GDP growth in the first quarter was 0.1%, 0.3 percentage points lower than expected in February.

The pound was hit by the Bank's downbeat assessment of the United Kingdom economy - revealed in the quarterly inflation report it published alongside its rates decision today - which implies that a rate rise in the coming months is unlikely.