The dovish comments out of the Bank of England last weekend has caused some concerns with currency and rate traders in terms of valuations. This is another example of diverging central banks catching the markets off guard. With the BoE the implications of the dovish comments in the past week will be noise in the grand scheme of what stance the central bank takes. Historically the BoE has been on a lag to the US Fed in terms of policy, and investors expect and bet this much. This time seemed no different with the BoE talking about rate raises next year as the US is looking to raise this year. That was until this current meeting where Mark Carney the BoE governor made mention that external factors may prevent a rate increase at all in 2016. News outlets and analysts talk of a bluff or a reversal of that expectation in the future (this has happened in the past with the BoE and the markets diverging).
One thing that should be considered is the possibility that the BoE is taking a stance alongside the European Union and the ECB, which is being accommodative and looking to weaken the currency in order to remain competitive. This will affect the UK more than, say, America because it is very export dependent for growth.
This change in stance will cause a lot of investors to price in a new policy outlook in the UK as it will look to keep rates lower longer and be trying to devalue the currency. However this may prove harder than expected if the fundamentals do not fall in line with the rhetoric of the BoE. The UK could find itself in the same position that Germany will with the ECB round of QE, where they will have to accept higher inflation in the future in order to remain competitive and keep the currency low. In Germany's case the weaker countries need to get out of their deflationary rut, and start to have manageable debt to GDP levels. Whether these two countries will have the willpower to withstand inflation when it does arrive remains to be seen. In the case of the UK housing prices and household debt levels will continue to increase and cause concerns over a housing bubble, which may prompt the bank to give in.
What the bank does is going to be an interesting development to watch, to see how dedicated they are to the 'external factors' reasons not to raise rates and how this will affect the Economics of the country in the face of inflation when it does arrive. I feel that the central bank will not be able to keep up with the ECB in terms of lower rates for longer and that any attempt to do such will cause housing bubbles and inflationary concerns in the future. The data itself will determine the need for rate increases and talk any different should be looked at as ways to play down the currency in the wake of more ECB stimulus expected next month. A look at the changes in tone and the BoE's willingness to go ahead with this plan will have far reaching consequences in the position of the markets now and in the UK economy in the future.