How will the BoE react to general election? Pound weakens agains US dollar in anticipation
GETTY Demand for the pound is cooling this morning ahead of today’s interest rate decision
GBP/USD has declined -0.2 per cent to $1.273 as the markets remain sandwiched between two key monetary policy meetings. In polar opposite of yesterday’s Federal Open Market Committee (FOMC) meeting, there are virtually no expectations that borrowing rates will be raised today. However, this meeting is still likely to be a crucial one, with markets desperate to see how the Bank of England (BoE) is responding to both recent data and the current fallout from the general election.
Tuesday’s inflation data revealed that consumer price growth had accelerated against forecasts during May, reaching 2.9 per cent - above both the BoE’s inflation target and forecast for this year. Yesterday’s wage growth data further clouded the outlook for the UK’s consumer spending-driven economy, after showing a shock fall from 2.3 per cent to 2.1 per cent in the three months to April. This means real wages have fallen for two months in a row, which has dampened hopes that the economy has been able to rebound in the second quarter after growth slowed to a below-forecast 0.2 per cent in the first three months of 2017.
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The MPC is therefore facing a dilemma, as hiking rates would help control inflation and therefore prop up consumer spending, but it would also make it more expensive for squeezed households and businesses to meet their debt repayments, further stifling the economy. Last week’s shock general election result also demands a response. While political uncertainty would support the notion that interest rates need to remain frozen until the economic impact of the election result can be identified, suggestions that Theresa May could abandon austerity measures may have positive implications.
GETTY GBP/USD has declined -0.2 per cent to $1.273
Monetary policy is also the key driver of the US dollar today, which is currently appreciating after the FOMC hiked interest rates by 0.25 per cent to 1.25 per cent. The FOMC statement read: “Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. "Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined.”