Carney Introduces Threshold

Bank of England Governor Mark Carney, the first non-English BoE Governor, gave his first quarterly inflation outlook today and took the opportunity to apply an unemployment threshold to the banks quantitative easing program. Carney stated that the Bank of England will maintain its £375 Billion stimulus as long as the unemployment rate remains above 7%.

Carney’s future guidance comes one month after the British central bank called the markets expectations on benchmark interest rates, which are currently held at a record low of 0.5%, unwarranted. The unemployment is currently at 7.8% and current forecast have the unemployment rate above 7% until the end of the third-quarter of 2016.

This threshold was introduced in order to prevent a pre-mature increase in short-term interest rates which could derail the fragile recovery of the UK. Additionally Carney stated that any proceeds made from the stimulus package will be re-invested if needed. The BoE also mentioned that any threat to price stability as well as financial stability posed by the stimulus will cause and adjustment in it.

Forex traders reacted in favor of the Pound Sterling across all currency crosses and the GBPUSD is approaching the 1.5500 level in afternoon trade while the EURGBP broke down below the 0.8600 level. We may see a continuation of this upward trend in the Pound Sterling throughout the rest of the week before it becomes vulnerable for a correction.

Inflation is expected to retreat, but for now the BoE will tolerate inflation levels above its 2% target in order to support the economic recovery. Current inflation in the UK is 2.9% and Carney plays a dangerous game as a misjudgment in inflationary pressures could throw the kingdom back into a recession. Once inflation takes hold it requires a lengthy process of interest rate increases in order to cool the economy and allow inflation as well as inflationary pressures to recede. The BoE expect inflation to remain above 2.5% over the next 18 to 24 month. The BoE expect inflation to reach 2% in the fourth-quarter of 2015 with interest rates at 0.5%

Carney also stressed that the unemployment rate is a threshold at which the Bank of England may consider to reduce stimulus and that no such even will occur automatically. The 7% unemployment rate was intended as guidance to market participants in order to better gauge future monetary events and become more transparent with their communication.

The Bank of England raised it 2013 GDP expectations from 1.2% to 1.5% and for 2014 from 1.9% to 2.7%. Market participants should expect figure to be revised again. Overall forex traders should approach the Pound Sterling with caution and calculate violent price swings throughout the rest of the summer months and going into fall.

Written by Paxforex