European session review: GBP strengthens after BoE’s monetary policy statement

GBP rose against most of its major rivals in the European session on Thursday after the announcement of the outcomes of the Bank of England's (BoE) latest monetary policy meeting.

At their September gathering, the BoE's policymakers decided to keep the bank rate unchanged at 0.10 percent and maintained the asset purchase program at GBP895 billion, as widely expected. 

In its monetary policy statement, the British central bank said that its Monetary Policy Committee (MPC) revised down the UK’s  Q3 GDP forecast by around 1 percent since August’s projection in part due to the emergence of some supply constraints on output. It also noted that uncertainty around the outlook for the labour market has increased since the August meeting, as the closure of the furlough scheme looms at the end of September. The BoE said that its MPC’s members forecast the UK’s CPI inflation is to rise further in the near term perspective, to slightly above 4 percent in Q4, but added that the Committee’s central expectation continues to be that the current elevated cost pressures will prove transitory.  

Despite the overall cautious stance on the economic outlook,  the BoE stated that it saw some developments strengthening the case for tightening. “At its previous meeting, the Committee judged that, should the economy evolve broadly in line with the central projections in the August Monetary Policy Report, some modest tightening of monetary policy over the forecast period was likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term. Some developments during the intervening period appear to have strengthened that case, although considerable uncertainties remain.“

Another hawkish nudge was the fact that the MPC member Dave Ramsden joined his colleague Michael Saunders in arguing for the reduction of the pace of the UK government bond purchases from GBP875 billion to GBP840 billion.

An  even more hawkish signal from the BoE was the statement that “All members in this group agreed that any future initial tightening of monetary policy should be implemented by an increase in Bank Rate, even if that tightening became appropriate before the end of the existing UK government bond asset purchase programme.“