Mark Carney struck a cautious tone in his final meeting as Bank of England Governor as policy makers strongly rejected a rate cut at the first meeting of the decade.
Rate cut odds had spiked in recent weeks as policy makers struck a more dovish tone against the backdrop of weaker economic data into the end of the year. As has been repeatedly stressed though, this came in a period of significant political and economic uncertainty for the UK, which makes the decision to hold today all the more sensible.
Despite the very cautious tone, in respect to the ongoing risks to the economy, the central bank did stress the possible need to modestly tighten policy going forward , should the UK perform in line with expectations. Markets are still expecting the next move to be a cut, despite these warnings, although that may change as the data improves.
Ultimately, there’s still a lot of uncertainty around how the UK economy will respond to recent developments and how much of a drag we’ll see this year given that the WTO cliff-edge still exists at the end of 2020.
A rate cut over the coming months may still happen although Carney was keen to stress that just because markets imply that, it doesn’t make it so as the latest forecasts indicate a slower pace of tightening than before.
Cryptic as ever from the Governor but lets face it, expectations may change significantly before the next meeting – let alone the next inflation report – by which time Carney will be on the beech and relieved to not be facing the UK press anymore.
As far as the pound is concerned, we may have to wait a little longer to see 1.30 break against the dollar. It’s put up quite a fight this year, so far, and the BoE may now have tipped the scales in the bulls favour.
The big test now for the pair may come at 1.32, although there is one other important factor here and that is the dollar’s performance as the Coronavirus threat has grown. The numbers aren’t improving which is likely to provide continued support for the dollar and could limit upside in the GBPUSD pair.
