Where does the pound go from here?
The most significant change in the statement is the forward guidance. Let's take a look at the changes as per below.
December policy statement:
"Monetary policy could respond in either direction to changes in the economic outlook in order to ensure a sustainable return of inflation to the 2% target. The Committee will, among other factors, continue to monitor closely the responses of companies and households to Brexit developments as well as the prospects for a recovery in global growth. If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation. Further ahead, provided these risks do not materialise and the economy recovers broadly in line with the MPC's latest projections, some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at the target."
January policy statement:
"Monetary policy will be set to ensure a sustainable return of inflation to the 2% target. Policy may need to reinforce the expected recovery in UK GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak. Further ahead, if the economy recovers broadly in line with the MPC's latest projections, some modest tightening of policy may be needed to maintain inflation sustainably at the target."
I've marked in bold the key changes. So, what are they saying?
Essentially, they made sure that the message is clear. Inflation is the key worry now - as seen in the December report - and if that threatens to fall off even more, then they will surely be ready to take action if and when necessary.
They have acknowledged some improvement in economic sentiment post-election and from global developments but if this starts to peter out in the coming months, then they may have to err on the side of safety and cut rates as well.
Otherwise, if everything goes "according to plan" - which it will not - then perhaps they could stick with their old policy measures but they are playing coy on that by removing the "gradual and limited" wording to hint at a more dovish guidance.
Other than that, the other changes were mostly to reflect sluggish UK growth conditions and a weaker inflation outlook. On the latter, the BOE now sees CPI inflation staying below their 2% target 'throughout this year and much of 2021'.
But that is something I reckon markets are quite aware of already at the moment.
So, what are the key takeaways here and how is the pound going to react?
- Inflation, inflation, inflation. It is all about inflation data now and to some extent, general UK economic data as well. Expect markets to continue to be more sensitive to economic releases in the coming weeks/months to gauge rate cut pricing moving forward.
- Votes matter. It doesn't look like everyone in the MPC committee is convinced that a rate cut is needed just yet and it may take significant deterioration in the data to get enough people on board for a rate cut. The 7-2 vote today indicates that the threshold remains quite high.
- Pound relief but not too much. The currency can take heart in the decision and statement and potentially keep up a push towards 1.3100-50, but any significant rally beyond that requires data confirmation moving forward. As such, the reaction is merely a bit of a relief to the 50-50 coin flip but any major gains requires more work and real conviction that the UK economy isn't going to fall back into the same trap again.
