Sterling rallied yesterday after the Bank of England provided markets with hawkish forward guidance following its decision to leave the UK interest rates unchanged at 0.5%. Markets have now priced in the possibility of a rate hike in June at 60% which contrasts from the original projection of 50% by May.
The vote was unanimous with all 9 MPC members in favour of keeping borrowing costs constant. Minutes from the meeting revealed that "The Committee judges that monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report ".
The bank also noted that the UK has been a benefactor from the recent expansion seen in the global economy. Policymakers also discussed the boost likely to be received from the recent pick-up in wages and therefore upgraded its growth forecast for the UK economy to 1.7% this year, up from 1.5% three months ago.
With inflation expectations strengthening across major economies, investors now predict key central banks such as the ECB to normalize monetary policy at a faster pace. The bank’s governor, Mark Carney has now made it clear that the MPC wants inflation to return to its 2 percent target over “a more conventional horizon”, signalling to markets its intentions to tackle price growth over the next two years as opposed to the next three.
However the positive outlook for the UK has been largely eclipsed by the status of the Brexit negotiations and uncertainty over the future relationship with the EU. Some analysts have highlighted that the bank’s forecasts should not be taken for granted as they are based a “smooth” transition away from the bloc.
09:30 – GBP: Manufacturing Production Month on Month expected to be lower at 0.3% from 0.4%