Bank of England might send message on distant rate hike bets

While the minutes stated there was “no mechanical link” between the BOE decision and those of other central banks, it is caught between a European Central Bank that’s adding stimulus and a U.S. Federal Reserve that may be just a week away from the first increase in its key rate since 2006. She is ready to raise rates at the Fed’s policy meeting this month as the domestic economy is improving, which is also affirmed by the latest job data.

“Policymakers in the USA… faced with an economy growing at a similar rate to the United Kingdom, as well as a similar level of unemployment and inflation and even lower wage growth, are sending a clear message that now’s the time to start the process of normalising policy”.

Traders are betting officials will keep the Bank Rate unchanged through 2016, according to forward contracts based on the sterling overnight index average, or Sonia. Economists have argued that Turkey is long overdue for an interest rate rise to rein in inflation and put a floor under the lira.

The outlook for GBP/USD could remain more challenging in the near term, however, because we expect USD to do well more broadly at the start and the early stages of the Fed tightening cycle.

The BoK has predicted gross domestic product growth of 2.7% for the whole of 2015.

The BOK said consumer price inflation rose to 1.0 percent in November from 0.9 percent the previous months mainly due to a lower fall in the cost of petroleum prices and the higher service fees.

Sterling fell on Thursday after the BoE warned of more barriers to growth next year, focusing on a renewed fall in global oil prices and slower rises in wages. All 52 economists in a Reuters poll believed the Bank will announce on Thursday that it is keeping its benchmark lending rate at 0.5 percent, where it has sat since early 2009 when Britain was in the grip of the financial crisis.

The rate setters noted “existing uncertainties mostly referring to the global environment, primarily the uncertain reaction of market participants to an expected increase of interest rate by the Fed and its impact on commodities and financial markets”, the bank said in the statement.

It is the 81st meeting in a row at which rates have been left unchanged at 0.5%. “In this process it will closely monitor external risk factors such as any changes in the US Federal Reserve’s monetary policy or in economic conditions in emerging market countries including China, the movements of capital flows, and the trend of increase in household debt”.

Following the release the pound to dollar exchange rate conversion slipped to 1.5154 confirming markets have read today’s event as having done little to close the policy gap between the United States and UK.