Tuesday, 12 September 2017

Bank of England’s September meeting in focus

Posted by Valentine at 11:39 Labels:

The Bank of England’s Monetary Policy Committee is holding its September meeting on Thursday and there are no expectations for substantial changes to the current configuration.

The UK regulator will most likely leave its short term interest rate at a record low of 0.25 percent, while keeping the volume of its quantitative easing program at $573 billion.

What traders will be paying attention to?

While market participants are not hoping for any modifications to the current configuration, there is a topic that must be addressed during the policy event: inflation.

Following the UK June referendum in which Britons decided to leave the European Union, the pound took a strong hit against major currencies such as the US dollar and the euro.

Since then, the weaker pound has significantly increased the cost of living for British citizens. Inflation is now standing at 2.6 percent, which goes comfortably above the central bank’s 2.0 percent target. So should we see any moves to solve this situation?

Not so sure. As economic expansion is threatened by Brexit negotiations, the BoE seems to be resilient to hike interest rates in order to control prices growth.

Therefore, investors should keep an eye on this matter and see how policymakers intend to control inflation. BoE Governor Mark Carney promised last month that two rate hikes could take place over the course of the next three years, which is one more than originally expected.

How to play the pound?

Think of it this way. Interest rates are not to be expected until the third quarter of 2018, Carney said in the August monetary policy encounter.

So what can we work with? One word: rhetoric. Instead of waiting for actual changes, you should weigh willingness of policymakers to increase or not interest rates.

A hawkish rhetoric by BoE members would offer considerable support to the British pound. Higher rates typically promote local currencies as they raise competitiveness.

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