When we look at the chart below of the year-over-year percentage change in retail and food services sales in the USA economy, we see consumer spending is already pulling back.
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However, the BoE said there was no “mechanical” link between United Kingdom policy and those of other central banks.
The US bank’s benchmark federal funds rate has been locked near zero for almost seven years.
Sterling gained against the euro and traded at its highest in nearly three weeks against the dollar on Thursday ahead of a Bank of England statement that some are looking to for a more bullish tone on the timeline for interest rate hikes. Non-farm payrolls grew by a healthy 211,000 in November. Therefore, when the US dollar becomes strong, the value of mortgage bonds also rises. In October, inflation rose 0.3 %.
It’s surprising the pound weakened so much after the decision because officials barely changed their outlook, said Adam Cole, Royal Bank of Canada’s head of global foreign-exchange strategy.
However, “core” CPI – the more meaningful gauge of prices – was “subdued” and even the headline rate of CPI was expected to remain below 1% until the back half of 2016, which was well away from the Bank’s inflation target of 2%.
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. The cash reserve ratio (CRR) has also been unchanged at 4%.
NZ Forex expects the central bank “could sit on its hands this week and do nothing for another month”, although any gain in the kiwi would be capped by the prospects of a Fed rate hike, he said.
Policymakers are likely concerned over falling oil prices, which could keep inflation subdued.
As for the stock market, low interest rates have been a godsend for stock prices since 2009.
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“While I believe the economy is in a position to withstand a rate hike, I can understand why the central bank may be reluctant given the number of possible risks next year”, said Craig Erlam, senior market analyst with retail currency broker Oanda. “A crucial question now is: Does the Monetary Policy Committee really want to sound anything like as dovish as markets?” The Board forecasts that the global economy will maintain its recovery going forward, albeit at a moderate pace, centering around advanced economies such as the US, but judges that the possibilities exist of its being affected by heightened worldwide financial market volatility due for example to a shift in the US Federal Reserve’s monetary policy, and by the weakening of economic growth in emerging market countries.
