Latest Reactions to Bank of England Quarterly Inflation Report and Press Statement

The Bank of England's Inflation Report introduced a 7 pct unemployment threshold - a point at which the Bank will only begin considering raising the interest rate.

Considering the BoE expects a 50% probability that the unemployment rate will have fallen below 7% by the third quarter of 2016 it suggests that interest rates in the UK are on hold far longer than the market is currently pricing in.

So why is the British pound rallying?

In reaction to today's event, Ross Walker at RBS says:

"The BoE's forward guidance is more nuanced and qualified than expected and therefore less dovish than expected. As expected, the unemployment rate was adopted as the 'intermediate threshold', but the 7% rate and other conditionality 'knockouts' relating to CPI inflation and broader financial stability considerations leave the overall impression of a less dovish policy signal than expected.

"In terms of time-scale, much will hinge on the outlook for the unemployment rate, where the MPC's central projection is for a relatively slow-paced decline given the growth outlook being signalled by the business surveys. Forward guidance is less dovish in the detail.

"It should be emphasised that reaching this 7% threshold would not automatically prompt a policy tightening; rather it would 'knockout' the guidance linking Bank Rate to the unemployment rate."

Camilla Sutton at Scotiabank points out the benefits of forward guidance:

1) provides clarity on the trade off between inflation and growth;
2) reduces uncertainty about the path of monetary policy and
3) allows MPC to explore the scope for economic expansion without risking price or financial stability.

Shaun Osborne at Scotiabank is a little surprised by the British pound's reaction to today's news:

"The BoE Inflation Report was the Bank’s official start of forward guidance, and it’s hard to interpret the document as anything but dovish.  In addition to clearly talking down rates—as they did in their July meeting—the Bank also upheld the potential for further QE if conditions warrant.  

"Despite the clearly dovish implications of the report, it seems to have some credibility issues with the market, with the moves in Sterling interest rate futures running counter to what would be expected. The GBP reaction was initially negative, but has quickly turned and the currency is now at a fresh cycle high in the July/August bull run.  

"The reaction may not be complete however, and today could remain a volatile day for the GBP."

Andy Scott, premier account manager at foreign currency exchange brokers HiFX:

"Now that the market has had the forward guidance confirmed and no longer has to speculate, this could actually be very positive for the pound since the economy is now performing better. Investors don’t like uncertainty and that’s shown in the value of sterling since Mr Carney began his tenure at the start of July.

"Perhaps now its value will better reflect the relative outperformance of the economy, particularly against our main trading block the Eurozone."

Glenn Uniacke, senior dealer at Moneycorp, said:

"Britain’s service sector growth may have given the pound a temporary boost, but today’s forward guidance is unlikely to serve sterling so well. Despite real signs of economic recovery the market has been told to expect UK interest rates to stay at near-zero for some time, which, in the weeks to come, could leave the pound vulnerable against the US dollar and euro, marking another chapter in sterling’s volatile story."