The pound snapped a two-day rally and gilts rose after the Bank of England (BoE) signaled that a policy tightening wasnâ€™t imminent.
Sterling rose initially after the central bank said that some within its committee had become more concerned about accelerating inflation and that they were â€œcloser to those limitsâ€ of tolerance. It reversed gains after a fuller reading of the statement showed that the monetary authorityâ€™s forecast for peak price growth was 2.8 percent for next year, well within market expectations. It also said that there is more slack in the economy than thought, suggesting that policy makers arenâ€™t close to raising rates anytime soon.
“The market expected higher inflation forecasts and therefore todayâ€™s outcome is not a hawkish surprise,” Manuel Oliveri, a strategist at Credit Agricole CIB, said in e-mailed comments; the long-term growth outlook is changed only marginally and the long-term growth uncertainty remains intact; “There is no indication of BOE considering higher rates anytime soon.” “Limited changes to the inflation forecast strike us as more dovish than the market baseline heading in,” Josh Oâ€™Byrne, strategist at Citigroup, said in e-mailed comments.
“Moving the assessment of labor-market slack also buys some time when interpreting inflation overshoots and robust activity.” Oâ€™Byrne expects monetary policy to offer less support to the currency. â€œThe BOE sees more labor-market slack, and itâ€™s only some members who are hawkish,â€ said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. â€œThere are no hikers in the MPC despite recent inflation concerns stemming from the weak pound and an apparent lack of tolerance.
A rate hike is not yet on the cards as some market participants are sensing.â€ â€œNow that the Bank of England is out of the way we think it is a good time to enter GBP shorts,
according to Deutsche Bank.
â€œWe remain very bearish on the pound targeting a move close to parity in both GBP/USD and EUR/GBP,” strategist Oliver Harvey said in a note to clients.