The Bank of England Turns Dovish, GBP/USD Turns Bearish

UK central bank set to hold interest rates amid slowdown

The UK's Consumer Prices Index (CPI) fell yo 2.5% in March, the lowest rate in a year, and although the Office for National Statistics is yet to publish data for April, the Bank's Monetary Policy Committee voted 7-2 to keep interest rates at 0.5%, anticipating inflation would fall back to its target of 2% more quickly than anticipated. The BoE on Thursday cut its forecasts for inflation and for growth, especially in 2018, reflecting the weak first-quarter figures which the central bank said would probably be revised up.

Britain's economy grew more slowly than most of its peers previous year, after a Brexit-driven jump in inflation hit consumer spending power and some businesses delayed long-term investment. BoE governor Mark Carney said: "The overall economic climate in the United Kingdom looks little changed thus far".

Financial markets had seen a rate hike this month as a near certainty until the recent first quarter data shock and subsequent gloomy reports from different sectors of the economy.

Commenting on the MPC's decision, Fabrice Montagne and Sreekala Kochugovindan at Barclays Research told clients: "While a confident BoE in normal times would likely have happily looked through a growth soft patch and hiked, increasing doubts regarding the outlook amid high levels of uncertainty led the MPC to forgo a rate hike in May and reshape the timing of its tightening cycle".

Despite weak growth, the BoE sees the need for rate hikes because it thinks the economy could overheat due to long-term weak productivity and lower immigration driven by Brexit.

The tone could be considered dovish as the BoE removed the word "expected" from the policy guidance and instead said it is "likely" to raise rates.

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The escaped prisoners then took a number of officers' hostage, five of whom have now been declared dead. However, police arrested three of the militants (in Bogor) before they could carry out their plans.

Inflation was seen dropping to 2.1 percent in a year's time, and returning to target a year later, but only if interest rates rose by 25 basis points about three times over three years, as markets expect.

"In our base case, assuming that economic activity bounces back in the second quarter and CPI inflation proves stickier over the coming months than it did in Q1, we expect the Bank of England to deliver a quarter-point increase in interest rates at the August meeting". In the year to March, annual consumer price inflation was 2.5 percent, well below the bank's projection of nearly 3 percent.

Wage growth was forecast to pick up slightly less strongly this year than had been forecast before.

In the background, the United States dollar spot index was off by 0.42% to 92.6470, but just off its best levels since the end of 2017.

However, JP Morgan economist Allan Monks said the BoE had sent a "muddled message" about its intentions.

They said that no progress has been made in the economy, so no rate hikes this time.

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