Markets

Sterling tumbles as BoE keeps rates on hold, cuts growth forecasts

Sterling tumbles as BoE keeps rates on hold, cuts growth forecasts

"The speed limit of the economy has slowed", he said on Thursday.

If the balance of the Monetary Policy Committee (MPC) continues to lean towards the doves the Pound Australian Dollar exchange rate could struggle to hold onto all of its recent gains.

The Bank's inflation report said it expected economic growth of 1.7 per cent in 2017 and 1.6 per cent in 2018, down from the 1.9 per cent and 1.7 per cent in previous forecasts.

Some investors see hawkish comments from policymakers at the Bank as attempts to talk up a currency that has lost nearly 15 percent against both the euro and dollar since last June's vote for Brexit.

"The door is still open to a hike, but it doesn't look imminent", Alan Clarke, a rate strategist with Scotiabank said, as quoted by Reuters.

Quantitative easing was also unanimously kept unchanged at £435bn and corporate bond purchases remained at £10bn.

"Sterling plunged by over a cent against the Dollar and was trading at 90 pence against the Euro after the Bank of England delivered a mixed set of signals to the market", notes Neil Wilson, an analyst with ETX Capital.

'While the current picture remained one of an economy showing overall resilience in the face of concerns about the outlook, the subdued level of business optimism suggests it's likely that growth will at least remain modest and could easily weaken in coming months.

"The UK economy is beginning the process of adjusting to a new, as yet uncertain, economic relationship with the European Union". Still the BoE is basing its long-term forecasts under a "smooth" Brexit assumption according to Carney.

The correlation between the FTSE 100 and the pound has returned to negative today, with the FTSE 100 up 1.3% so far and GBP/USD down 1.15%. Weak wage growth has been a problem for many years in the United Kingdom and across the world, and is thus not directly linked to Brexit. Chancellor Philip Hammond has agreed to underwrite an additional £15bn of lending to banks through the Term Funding Scheme to meet higher-than-expected demand, which has been boosted by stronger-than-anticipated economic growth.

With low unemployment, wages are expected to rise.

Average wage growth has been weak since May, falling below the rate of inflation, and the Bank has now downgraded its nominal wage growth forecast for 2018 to 3 per cent, down from 3.5 per cent previously.

The downturn for the British currency may be far from over, said FXTM research analyst Lukman Otunuga, blaming "the unsavoury combination of uninspiring United Kingdom economic data in July and uncertainty surrounding Brexit talks". "CPI inflation was substantially above the target, and was projected to remain above the target throughout the three-year forecast period". It expects inflation, now at 2.6 per cent, to peak at 2.7 per cent in the final quarter of this year and to gradually fall to 2.2 per cent over the next three years, slightly above the Bank's official 2 per cent target.