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Sterling’s decline is accelerating this afternoon after the Bank of England raised its short term GDP forecast for the UK as Mark Carney stressed there was more spare capacity in the economy than first forecast.
At pixel time, the currency is down by 0.9 per cent against the dollar, at $1.2540, wiping out gains from the previous 24 hours.
Mr Carney noted that policymakers thought there was more slack in the UK labour market, allowing interest rates to remain on hold despite growth picking up.
“We think the economy can run with a lower rate of unemployment without us having to adjust policy,” said Mr Carney.
The central bank also noted that the pound has picked up since its last Inflation Report in November – a development that has caused it to trim its inflation forecasts, in turn dampening the (always ambitious) case for the BoE to start tightening up its policy.
For those taking notes, yes, this is all rather circular. Still, it all highlights that, as Deutsche Bank argued in a note earlier today, some of the more hawkish expectations for the BoE may have been somewhat premature.
In outlining its ‘five reasons to stay short the pound’, the German bank said:
The Old Lady* may strike a more hawkish tone at today’s Inflation Report. But the market is already pricing a 50% chance of a hike by year-end. This seems optimistic. Not only is the politics messy, but much of the economy’s recent resilience can be explained by households frontloading purchases ahead of an inflation shock. This seems to be coming to an end, as per recent weak credit numbers and retail sales. Sterling is expensive versus UK-US real rates, meanwhile.