Last night the Bank of England (BOE) lowered their growth forecast to 2.5% for this year. The event was anticipated after a slump in growth in quarter one. The Governor of the BOE, Mark Carney; also said that Interest Rate hikes will be gradual.
Employment levels in the UK were forecast to be at 5% by 2017. The figure has been the UK’s best performer, since January 2014 the figure has gradually decreased from 7.1%. With a decrease in Unemployment, and a corresponding increase in wage earners spending their wages rather than Unemployment Benefits, the Inflation Rate should in theory increase; however this has not been the case.
Last night’s Inflation report for the BOE is essentially an explanation of why they will continue to kick the interest Rate Hike ‘can’ down the road. Stated in the report last night;
‘Inflation is then projected to rise further as wage and unit labor cost growth picks up and the effect of sterling’s appreciation dissipates. The MPC judges that it is currently appropriate to set policy so that it is likely inflation will return to the 2% target within two years.’
This Statement was concluded that any form of a hike will most likely be ‘kicked’ down the path until mid-2016. The market proceeded to press the sell button on the GBP, within 3 hours the Sterling lost almost 3-4 cents against the AUD.
The statement from the inflation report suggests long term prosperity for the GBP, as wages growth contributes to the cost of goods sold. Once the UK inflation rate returns to an adequate figure (2%), the flood gates should open to more tightening of the UK’s monetary policy.