Pound, Gilt Yields Slide as BOE Rate-Increase Expectations Ease

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Pound, Gilt Yields Slide as BOE Rate-Increase Expectations Ease

Was it dovish? Or was it actually hawkish?

On Thursday, the Bank of England (BoE) cut its forecasts for British growth as it left its main interest rate at a record low 0.25% following a regular monetary policy meeting.

The Bank of England's Monetary Policy Committee (MPC) has voted to hold the base rate at 0.25%.

Before Thursday's central bank decision, sterling briefly rose to a 11-month high of US$1.3267 per United States dollar, rounding off a strong 4.5 per cent rise over the last six weeks. Such a sharp rise reflected sterling's fall from 1.48 US dollars to the pound on the night of the referendum vote a year ago to 1.31 USA dollars now, having touched as low as 1.22 USA dollars in between.

"That has certainly helped boost competition in the mortgage market but again underlines that rates won't necessarily remain at the current lows forever".

The Pound US Dollar exchange rate could find a rallying point this afternoon, though, as the ISM non-manufacturing composite index is forecast to have dipped slightly from 57.4 to 56.9 in July. "With this in mind, we believe that it will be hard for the BoE to hike rates before the end of 2017 and to tighten more aggressively than the market now expects". ING doesn't expect tightening to start until 2018.

We do not expect a rate increase especially as Kirstin Forbes who was one of the three members who voted for a rate increase last time is longer a member of the MPC.

THE BANK of England today cut its forecasts for the size of economy and warned that consumers face a continued squeeze on their income.

Growth is expected to slow to 1.6 percent in 2018, down from a previous forecast 1.9 percent. As this pattern extends (which it's expected to do tomorrow) the market will be getting closer and closer to full employment, more pressure on inflation and wage rises.

He said the objective of the MPC was not "the path of interest rates but the stability of inflation in the medium term and subject to that the stability of the economy".

Mr Carney said Brexit uncertainty "weighs on the decisions of businesses and households and holds down both demand and supply". However, the case for a rate hike has strengthened in recent months.

"Given that GBP/USD has been riding on the coattails of a rising Euro, we would look for a recovery in the politically-charged USD - and easing of Euro euphoria - to weigh on GBP/USD". They should take advantage of the great rates on offer and potentially lock their rate down at the same time, to prepare for and buffer against any rate changes in future. The BOE estimates a 1.7 percent increase by year-end rather than May's 1.9 percent estimate.

So where does all this leave investors after the mixed messages from Threadneedle Street on Thursday?

The dollar decline stalled somewhat yesterday, with little new news from the Oval Office and as markets gear up toward today's Nonfarm Payrolls report.

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