Pound falls as Bank holds rates and cuts forecasts

Bank of England staff begin first strike in 50 years

Cost of funds not binding constraint

At its meeting ending on 2 August 2017, the MPC voted by a majority of 6-2 to maintain Bank Rate at 0.25%.

Matthew Brittain, investment analyst at Sanlam UK, said: "This marginally more dovish sentiment has no doubt been helped by the departure of long-time hawk Kristin Forbes, and puts the BoE firmly back on track to its "slow and steady" normalisation approach".

But markets focused on the Bank's downward revision of its 2017 growth forecasts, to 1.7 percent from 1.9 percent in May, as well as its unexpected lowering of its inflation projections, which it now saw at just under 2.6 percent in a year's time after peaking at around 3 percent in October.

"In our view, the Bank of England's forecasts are still slightly optimistic about the near-term outlook for the United Kingdom economy".

Some investors see hawkish comments from policymakers at the Bank as attempts to talk up a currency that has lost nearly 15 percent against both the euro and dollar since last June's vote for Brexit.

Nevertheless, as anticipation mounted ahead of the Bank of England's (BoE) August policy meeting and the release of the latest quarterly Inflation Report the mood towards Sterling remained generally positive.

It's more than a decade since the Bank of England last sprang a surprise rate increase on the market, with a hike in January 2007 that wasn't anticipated by any of the 22 economists surveyed by Bloomberg News.

It also fell around a cent against the dollar, plumbing a three-day low of $1.3140, having earlier reached an 11-month high of $1.3267 against the U.S. currency.

The cuts contrast with strong economic growth elsewhere around the world, which is enjoying its biggest boom in five years.

With political uncertainty, soft economic fundamentals and ongoing Brexit concerns weighing heavily on the British economy, "investors may start to question whether the BoE moves forward with raising rates in 2018", he warned.

The central bank slashed its growth forecast for this year from 1.9% to 1.7% as a result.

Fabrice Montagne, chief United Kingdom and senior European economist at Barclays, said: "We expect the Bank of England to downgrade its forecast in order to reflect disappointing data".

Nevertheless, GBP/USD retreated to 1.3145 having traded as high as 1.3268 after the slight improvement in the July services PMI.

This £15bn increase was due to the fact that banks had lent out more cash in the past year than expected - and bank lending is now being supported by the Bank's Term Funding Scheme. Additionally, expected wage growth - which is a major factor in the BOE's monetary policy decisions - was slashed to 3% from 3.5% for 2018. On the other hand, they downgraded some of their forecasts, especially for wage growth in 2018. It expects inflation, now at 2.6 per cent, to peak at 2.7 per cent in the final quarter of this year and to gradually fall to 2.2 per cent over the next three years, slightly above the Bank's official 2 per cent target.

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