Forex Flash: BoE fallout and the ensuing ramifications – UBS

FXstreet.com (Barcelona) - Today Chancellor George Osborne announced changes to the Bank of England remit, ostensibly to formally recognize the 'use of unconventional tools'. The inflation target was kept unchanged at 2%, however the timing of the BoE open letter on CPI would be changed. Crucially, and directly citing the 'example of the Federal Reserve', the Bank of England now 'may wish to issue explicit forward guidance' and adopt 'intermediate thresholds' – i.e. numerical targets for inflation and growth, such as CPI and the unemployment rate. According to Research Analyst Geoffrey Yu at UBS, “The BoE is expected to 'assess' these changes and report the response in its August inflation report.”

The immediate reaction in sterling reflects the view that the BoE is not going for the kitchen sink for now and allow GBP to 'do a JPY'. “It is likely many investors were positioned for even more aggressive measures. In addition, even if the changes were adopted, full execution may have to wait until the September BoE meeting at the earliest.” Yu adds. Such timing may also have surprised sterling bears, who sought an immediate injection of new stimulus, even before Carney's term begins.