On Thursday the 14th of September, the BoE took the decision to maintain the key interest rate at its current level of 0.25%. This was in line with market expectations.
The key factor in the regulator’s decision was the level of inflation in the UK. In August, annual consumer inflation in the UK rose by 2.9%, while in July; this value was at 2.6%. As such, deflation is no longer a concern for Britain. All that’s left to worry about is Brexit, which us turning out to be not at all as fatal as had been expected earlier.
It’s important to note that the US has so far failed to emulate the UK in overcoming deflationary pressure. According to Thursday’s CPI data, August saw just a 1.9% rise in YoY inflation, just short of the 2% target. The UK is expecting a 3% rise in inflation for the year. The Bank of England’s governance has made it clear, in no uncertain terms, that its expansionary monetary policy will, sooner or later, be exhausted, and that it will eventually be necessary to tighten monetary policy through gradual interest rate hikes.
We believe that the Bank of England will drag this out as long as possible, no doubt looking at the decision of the European Central Bank on the same issue. Clearly, with the UK set to leave the EU, the last thing they need is an overvalued pound, so they won’t be in a hurry to bring its value up. Nevertheless, on the news from the BoE, the GBPUSD currency pair shot up to reach a new monthly high. We reckon that this pair will trade at around 1.33 – 1.34 over the next few days.