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Bank Of England Post Mortem: Rate Hike On Hold Due To Crashing Commodities, Strong GBP

From CA's Valentin Marinov

BoE inflation report - strong GBP made all the difference it seems

Reading through the August inflation report two things seem to stand out:

1/ The MPC is more optimistic on (domestic demand-driven) GDP growth – supported by growing wages, cheaper bank funding and growing house prices.  Indeed, they revised their growth projections slightly to the upside compared to May.

2/ The MPC has turned more cautious on inflation because of persistent commodity price weakness and, indeed, FX appreciation. This is reflected in their lower inflation projections.

The message is: yes, we will hike but not before we are certain that the negative impact from lower commodity prices and stronger GBP have abated. The above also means that to a certain degree the decision to hike or not is not really in BoE’s hands, at least for now. This is different from the Fed, where we do see clear signals that hikes will be needed fairly soon.

This also means that verbal intervention in GBP by Carney is now a distinct risk going into the press conference at 12:45