The person responsible for the Bank of England (BOE), Megan Greene, said Friday that they are not sure whether the weakness in the United Kingdom’s economy is caused by demand or supply, according to Reuters.
Key aspects
“More concerned about the offer, really weak productivity growth.”
“There are concerns about the impact of changes in the government budget.”
“We have no idea how US tariffs will be when the dust settles.”
“The risk is now on the uninflationary side due to tariffs.”
“We are seeing that a production gap opens that should help bring inflation back to the goal.”
“We should see some commercial deviation from China.”
“Light concern that inflation expectations show that people are more concerned about inflation.”
“The United Kingdom labor market has been weakening quite slowly, but we should see that salary growth decreases.”
Market reaction
The GBP/USD greatly ignores these comments and was last losing 0.2% in the day in 1,3310.
BOE FAQS
The Bank of England (BOE) decides the monetary policy of the United Kingdom. Its main objective is to achieve prices stability, that is, a constant inflation rate of 2%. Your instrument to achieve this is the adjustment of basic loan rates. The BOE sets the type to which it provides commercial banks and to which banks lend themselves to each other, determining the level of interest rates in the economy in general. This also influences the value of sterling pound (GBP).
When inflation exceeds the objective of the Bank of England, it responds by raising interest rates, which makes access to credit for citizens and companies more expensive. This is positive for sterling pound, since higher interest rates make the United Kingdom a more attractive place for world investors to invest their money. When inflation falls below the objective, it is a sign that economic growth is slowing down, and the Bank of England will consider the possibility of lowering interest rates to reduce credit in the hope that companies ask to borrow to invest in projects that generate growth, which is negative for sterling pound.
In extreme situations, the Bank of England can apply a policy called Quantitative Easing (QE). The QE is the process by which the BOE substantially increases the flow of credit in a stuck financial system. The QE is a policy of last resort when the descent of interest rates does not achieve the necessary result. The QE process implies that the Bank of England prints money to buy assets, normally state bonds or corporate bonds with AAA rating, banks and other financial institutions. Which usually translates into a weakening of the pound sterling.
The quantitative hardening (QT) is the reverse of the QE, and is applied when the economy is strengthening and inflation begins to rise. While in the QE the Bank of England (BOE) buys state and business bonds from financial institutions to encourage them to grant loans, in the QT the BOE stops buying more bonds and stops reinvesting the main one that expires of the bonds it already has. It is usually positive for sterling pound.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
