Week in FX Europe – BoE Shifting The Goal Posts?

Shifting the BoE job threshold of +7% seems to have already begun. It started this week following the UK inflation report and has since been backed by BoE member Weale. He is the only policymaker to vote against the terms of the Bank’s forward guidance plan launched in the summer. He has indicated that it’s very possible that the “Old Lady” may keep their benchmark-lending rate at +0.5% even when unemployment happens to fall below the current desired threshold.

Like any other Central Bank, the BoE cannot ignore increases in inflation expectations, which in the UK have picked up. British policy makers may need to raise interest rates before all spare capacity in the economy is actually used up. Inflation in the UK has been running above the Bank’s desired target of +2% for many years. Why? This has occurred mostly on the back of policymakers concentrating on getting the UK economy kick started by any means possible. They have been doing the same as Fed and the BoJ, applying quantitative easing- slashing interest rates and buying government bonds – keeping cash cheap and plentiful.

Last month inflation in the UK happened to fall sharply to +2.2%, which has allowed the BoE to revise down its future forecasts this week for CPI. As it tries to support Britain’s economic recovery, the BoE will only consider raising interest rates from their record low of +0.5% once unemployment falls below +7% threshold. This percentage level was chosen as a “simple” measure for the public, so they could understand. However, the timing of raising rates is still an unknown entity.

Everything is still data dependent and the market is currently speculating on a 2015 rate move. BoE policy makers could easily shift the +7% threshold lower if Governor Carney and company does not believe a rate hike is warranted. UK monthly employment numbers will continue to be keenly watched.

• German Policy Maker Warns on Low Rate Driven Bubbles –
• Greek Finance Minster Warns Austerity is Dangerous –
• Ireland to Repay Bailout Loans in December –
• UK Government Approves £4 Billion Oil Field Investment –
• European Stocks Higher On US Stimulus Bet Despite Slower German and French Economies –
• Europe Adopts Austerity Budget –
• Russian Growth Forecasted at 1.5–1.6 Percent –
• ICAP Claims No Brokers Were Part of FX Manipulation –
• European Industrial Production Drops 0.5 Percent in September –
• Drop in UK Unemployment Forces BoE to Expect Higher Rates in 2015 –
• UK Jobless Falls to Three Year Low –
• Bank of England Confident About Recovery –
• France Key For Euro Survival – Blackrock –
• ECB’s Nowotny Warns of Stagnation Risk –
• UK Inflation Could Force BoE To Earlier Hike –
• UK Inflation Drops 2.2 Percent –
• Alan Greenspan Says Europe Needs Political Union –
• European Data Confirms Draghi Rate Cut Policy –
• Greek Goverment Survices No-Confidence Vote –
• Euro Zone Inflation Could Trigger Japan Style Deflation –
• German Politicians Reach Agreement on Banking Union –
• ECB’s Coeure: Crisis Responsible For Driving Low Rates –

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