Can the Bank of England Help GBP Recover?
Keeping forex interest rates at a very low level had always been the cornerstone of the monetary policy of the Bank of England. Over the last seven years, the interest rate has been maintained at 0.5%. However, in August 2016, the Monetary Policy Committee voted for an interest rate cut from 0.5% to 0.25%. This landmark decision is largely seen as a bid to provide stimulus for growth and to achieve the inflation control targets in forex trades, especially after the recent verdict of the people to leave the European Union. The interbank rates followed the path of the base interest rate and moved lower to 0.39%.
British Economic Data
There were various factors and economic indicators that blended together to cause this interest rate cut. The recent increase in GDP growth rate to 0.6% from the previous level of 0.4% (higher than expectations). The GDP annual growth rate was recorded at 2.2% as compared to the previous level of 2.0%. This was the consequence of a boost in stock markets industrial production while other economic sectors held their ground or posted improvements.
Chart View: GBP/USD
Forex Chart Source: easyMarkets
Moreover, there was a slight increase in inflation from 0.5% to 0.6%, against the expected level of 0.5%. This is observed by the Bank of England as a consequence of the vote to leave the European Union. However, the Consumer Price Index remained unchanged at 101 points. Similarly, the unemployment rate maintained its level at 4.9%, that was as per general market expectations. The GDP growth and inflation were the main determinants that caused the Bank of England to announce a rate cut. It was also believed that it will have a positive impact on the unemployment rate.
Labor Markets
The reduction in interest rate was also made possible by the fact that most of the labor-related indicators have remained steadied or improved. This includes minimum wages at 7.2 pounds ($9.44) per hour as compared to 6.7 GBP last year. Similarly, the wage growth has been recorded at 2.4% as compared to 2.3% previously. The wages in manufacturing have held nearly flat at 585 pounds per week.
There is a strong possibility that the interest rate will be further slashed to spur the economy towards growth. This might be possible in the wake of British Pound bouncing back after the post-Brexit hammering when it dipped to as low as 1.35 to a dollar. The Brexit Vote has forced the British economy to sail in unknown waters and a conservative and prudent policy by the Bank of England is perhaps the need of the hour. The interest rate cut is seen as the best measure under the current circumstances, but if the Bank of England is not able to construct strategies that spur growth, we will likely see more declines in the GBP/USD.
The author has no position in any asset mentioned.
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