Rand softer as Bank of England turns hawkish

Rand softer as Bank of England turns hawkish

Rand softer as Bank of England turns hawkish

BTMU Research discusses the reaction to today's BoE policy meeting in which MPC voted to maintain the Bank Rate at 0.50% and the stock of purchased assets financed by the issuance of central bank reserves at £435 billion.

The UK benchmark index has fallen deep into the red in today's session, following a downbeat lead from the U.S., staying firmly in negative territory following the Bank of England's (BoE) rate decision and inflation report.

Even though policymakers voted unanimously in favour of leaving interest rates on hold this month the odds of a May rate hike picked up substantially.

Sterling spiked 0.8% to $1.399 and 0.3% to €1.345 against the euro after the announcement, while the FTSE 100 is down nearly 1% to 7,210 points.

While the BoE is now trying to reduce inflation, if prices start to fall on their own then the Bank may hold off on near-term interest rate hikes.

Investors remain on edge after the latest selloff in global equities, as a burst of volatility hit long positions amid broader concerns that rising interest rates around the world could begin to reduce liquidity.

The governor of the Bank of England (BoE) warned on Thursday that interest rates would rise sooner than markets expected. While a future rate rise is likely, current rates remain low. The Dow Jones fell by over 4% for the second time this week as the hawkish Bank of England reignited concerns about higher interest rates globally.

This scenario, however, will leave inflation above 2% in three years, which can be judged to increase interest rates with more than the expectations of investors.

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And no homeowner should be expecting much of an increase in house prices any time soon. The minutes from the Bank of England's meeting has noted that the global economy is improving and that the United Kingdom is also improving, hanging on the coattails of global growth.

They said the United Kingdom will grow by an extra 0.4 per cent in 2018 and said that rate of acceleration will be sustained into 2019 too.

But with the economy improving, the bank decided in November 2017 to raise the rate by 25 basis points to 0.5% - its first hike in a decade - to control inflation which was 3.1% (CPI) in November. Britain's economy is now expected to grow by 1.7% in 2018, up on the previous 1.5% estimate.

When more clarity emerges over what Brexit actually will entail when Britain leaves the European Union in March 2019, Carney said the Bank of England will need to adjust its forecasts.

Though the anticipated growth level is modest in historical terms, it is expected to push up inflation gradually. The economist expects the MPC to hike rates two times this year, taking Bank Rate to 1.25%.

"As well as this crucial fact, the rest of the world is also doing way better than many people would have thought a year ago, so it makes it easier for the United Kingdom".

The chancellor replied by stressing the importance of boosting United Kingdom productivity and the government's efforts to make that happen.

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