GBP/USD:Trading the Bank of England Interest Rate Decision

The BoE April minutes showed that the MPC voted 9-0 to hold the key rate at 0.50%, and agreed to carry out the current policies set in place to steer the nation out of a recession. The central bank pledged to spend GBP 75B in asset purchases at the meeting in March as the region faces its worst economic contraction in over half a century, and said that 1Q GDP is likely to contract at ‘a similar rate’ to the 1.6% drop during the fourth quarter. Moreover, the BoE noted that ‘the initial efforts of the committee’s asset purchase program had been encouraging,’ but reinforce a weakening outlook for prices as ‘inflation still seemed likely to fall below’ the 2% target. Nevertheless, the jump in government spending paired with record-low borrowing costs should help to stem the downside risks for growth and price stability however, economic activity is likely to remain subdued throughout the year as the downturn in the global economy intensifies.

The Bank of England voted unanimously to slash the benchmark interest rate by another 50bp to a record-low of 0.50%, and pledged to purchase as much as GBP75B of government and corporate debt in an effort to steer the economy out of a deepening recession. Moreover, BoE Governor Mervyn King said that the interest rate in the U.K. is ‘very unlikely’ to fall lower from its current level as the board adopts quantitative easing to stimulate the ailing economy, and went onto say that ‘the inflation target provides a natural guide’ for monetary policy going forward. Nevertheless, as the BoE concludes its easing cycle, long-term expectations for higher rates could boost demands for the British pound over the near-term however, as the economic docket continues to reinforce a dour outlook for growth and inflation, fundamental headwinds are likely to weigh on the exchange rate as the economic downturn in the region intensifies.