Article by ForexTime

The British pound weakened sharply after the Bank of England on Thursday indicated that it will keep rates on hold at 0.5 percent for longer than previously thought.

Its forecasts suggest that even if rates do not rise until 2017, and then only to 1 per cent, inflation would still only just breach its target level.

This implicit acceptance that a later rate rise would still be consistent with delivering the BoE’s mandate to keep inflation to 2 per cent, caused sterling to fall more than 1 per cent against the dollar.

The BoE’s quarterly economic forecasts showed the medium-term outlook for inflation and growth almost entirely unchanged from its previous predictions in August. Inflation was likely to remain below 1 per cent for most of 2016, the bank said, before gradually returning to its 2 per cent target and ending 2018 marginally above that level.

But to keep growth and inflation broadly on track, the central bank had to base its forecasts on interest rates remaining at rock bottom rates of 0.5 per cent until the spring of 2017, a year later than it assumed in August.

Lower interest rates for longer would stimulate British households and companies into spending more, offsetting a weaker outlook from the global economy, the BoE said.

Encouraging domestic spending had potentially serious consequences, Mr Carney warned, citing “unsecured credit growth at 8 per cent for consumers, house price growth picking up, activity in the housing market picking up and a further fall in the savings rate to historically low levels”.

“We are conscious of those developments,” he said, adding that the BoE would need to think about using levers to curb credit growth — known as macroprudential tools. “That does bring into scope some macroprudential considerations,” the governor said.

Article by ForexTime

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