Why BoE Will Not Raise Rates Anytime Soon

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Market Drivers for May 14 2014

UK employment data mixed, BOE stays pat

US rates remain a drag on the dollar as USD/JPY drops below 102.00

Nikkei -0.14% Europe -.18%

Oil $102/bbl

Gold $1300/oz.

Europe and Asia:

NZD Retail Sales 0.7% vs. 0.9%

EUR German CPI -25K vs. -30K

GBP UK Claimant Count 8.7% vs, 8.9%

GBP Unemployment 6.8% vs. 6.8%

GBP Avg. earnings 1.7% vs. 2.1%

EUR Industrial Production -0.3% vs. -0.3%

North America:


Cable tumbled in London trade today dropping to within a few points of the the 1.6750 level after a cautious BoE Governor Mark Carney suggested that rates will likely remain low for the foreseeable future. In delivering the BoE inflation report Mr. Carney stressed that despite recent robust growth in the UK economy, spare capacity remains substantial providing the central bank with plenty leeway to maintain its ultra accommodative monetary policy.

To further support Mr. Carney’s stance, today’s UK labor data came in mixed. The unemployment rate declined another 10 basis points to 6.8% and claimant count was reduced by another -25K, but average wage gains saw only a tepid 1.7% rise versus 2.2% eyed confirming the BoE’s view that inflation pressures remain non existent.

Mr. Carney also dismissed calls to use interest rate policy to temper UK’s booming housing market noting that such action was not the right tool to control that sector. Overall, the BoE maintained a generally dovish stance and provided no reason to believe that it would tighten monetary policy anytime before Q1 of 2015.

Cable dropped in reaction to the statement as currency traders were clearly disappointed with BoE’s cautious posture. However, it is not at all surprising that UK policy makers would maintain such a dovish stance given the weakness of the dollar and cable’s 10% appreciation over the past year.

The surprising decline in US rates has made all other G-7 central banks markedly more dovish as they attempt to maintain a semblance of equilibrium in their exchange rates in order to protect the competitive position of their respective export sectors. That is why the BoE is unlikely to tighten policy in the near term and risk further appreciation of the pound that could derail the country’s nascent recovery. With little threat of inflation from either wages or price levels, the BoE is likely to remain stationary for the foreseeable future.

Cable has now broken the 1.6800 support level and could see further drift downward towards 1.6650, but only if US rates show some semblance of stability around the 2.60% level. If the yield on the benchmark 10 year US bonds continue to sink towards the 2.50% barrier cable’s drop may be short lived despite BoE best efforts to contain exchange rate appreciation.

Boris Schlossberg
Managing Director

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