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The charts that keep the Bank of England from raising rates

Emerging-market woes, low inflation and strong pound give the BOE a headache

Reuters
Bank of England Governor Mark Carney
The Bank of England’s so-called “Super Thursday” turned out to be not so super, with the central bank providing a gloomier outlook on the country’s economy and inflation path.

Through its trifecta of monetary policy updates — a rate decision, meeting minutes and quarterly inflation report — the BOE signaled it’s in no rush to lift its key lending rate from a record low of 0.5% where it’s been sitting since March 2009. This immediately triggered a selloff in sterling GBPUSD, +0.1528% which shaved off almost 1% against the dollar.

“If ‘Super Thursday’ was meant to be ‘Super Depressing’ then the Bank of England succeeded, with a more dovish than expected report causing a migraine for the pound,” said Connor Campbell, financial analyst at Spreadex, in a note.

But what made this statement so depressing? Compared with other large, Western economies, the U.K. is actually doing fairly well, with solid growth rates and low unemployment. However, there are a range of factors that are giving the BOE policy makers a headache and stopping them from tightening policy.

Low inflation

Bank of England

The BOE is targeting inflation at 2%, but the growth in consumer prices is no where close to that. In September, the consumer-price index fell 0.1%, raising concerns over outright deflation. In its inflation report on Thursday, the central bank said inflation is likely to stay below 1% until the second half of 2016, and only slightly overshoot the target in 2017, as the chart shows.

“Inflation continues to show very few signs of lifting up from the floor, so in hindsight, the MPC’s stance shouldn’t have come as too much of a surprise to the market. Today’s outcome will only serve to push back market expectations for a rate hike — it sounds to us like this might not happen until late next year,” said Alex Edwards, currency analyst at UKForex, in a note.

China woes

The slowdown in China that is rippling through other emerging markets was highlighted as a major concern for the global growth outlook in the BOE’s “Super Thursday” reports. The policy makers noted that China plays a significant role in the global economy because of its excessive trade links, with a sharp slowdown forecast to hit U.K. growth. For example, the BOE said a 3% fall in China’s gross domestic product would shave off 0.3% of the U.K.’s GDP.

“The outlook for global growth has weakened since the August Inflation Report. Many emerging market economies have slowed markedly and the Committee has downgraded its assessment of their medium-term growth prospects,” the Bank of England said in its report.

Strong pound

With the inflation report mentioning “sterling” 88 times, there is no doubt the appreciating pound is still a concern for the central bank. The solid currency hurts exports and lowers import prices, which squash inflation lower and make it harder for the BOE to achieve its target.

“[The] duration of effects of low oil and strong sterling are longer than previously thought,” said Kallum Pickering, senior U.K. economist at Berenberg, in a note.

“The governor stated that the MPC was of the view that disinflationary pressures would persist for the next two years and observed that the UK would be importing some disinflation some time to come,” he added.

Against the euro, the pound GBPEUR, -0.1285% has risen almost 9% this year, making exports to the U.K.’s largest trading partner more expensive.

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