Pound (GBP) Investors Less Optimistic after Bank of England (BoE) 'Super Thursday'

Household incomes will come under severe pressure this year as wages fail to keep pace with inflation, the Bank of England is expected to warn this week.

Matt Whittaker, Chief Economist at the Resolution Foundation, said: 'The Bank's judgement on the UK's earnings prospects reflects the relatively weak start our economy has made to 2017.

At midday, BoE held its benchmark interest rate at 0.25% on a 7-1 split between policymakers, hiked its inflation forecast for 2017 to 2.7%, from 2.4%, and put its outlook for average United Kingdom earnings growth at 2%.

The spot benchmark prices of 62% iron ore is now threatening to dip below the $60 a tonne marker after previously striking a multi-year high of $94.86 in February, with the Australian government forecasting in its recent budget that prices will reach $55 a tonne over the coming year.

Analysts say the economy has performed strongly since the vote to leave the European Union last summer but that other pressures are now coming into play.

Earlier this year the markets judged that the chances of an interest rate rise were so low there was only likely to be one increase over the next three years.

The Bank's two previous sets of quarterly forecasts brought big upward revisions to the growth outlook and on Thursday it only softened its short-term outlook a fraction, despite recent data showing that growth is now slowing sharply.

"Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth", added the BoE statement.

"The economy has surprised on the upside since last summer's referendum, powered by a resilient consumer, but it looks like households are now starting to feel the pinch from the current bout of inflation. The Bank expects inflation to peak a little below 3% in the fourth quarter".

Investors are now hoping that the bank will adopt a more hawkish tone this week in reaction to Britain's strong economic performance in recent months.

At the time of writing the GBP AUD exchange rate was trending around 1.7474 and the AUD GBP exchange rate was trending around 0.5722.

All eyes are on the Bank of England as traders brace for so-called "Super Thursday".

Earlier on Thursday, data showing weaker-than-expected industrial output and a widening of Britain's trade gap also weighed on sterling, which has struggled to break past the "psychological" US$1.30 mark this week. "Interestingly, in slight contradiction to its other comments, the Bank does acknowledge that they must balance the trade-off between returning inflation to target quickly and supporting jobs/activity - and that this trade-off is present "through most of the forecast period'".

The Bank cut its growth forecast to 1.9 percent, and held interest rates at 0.25 percent. Usually BoE inflation forecasts show inflation falling back to target.

The MPC said: "In the MPC's central projection, four-quarter GDP growth slows over 2017, as quarterly growth remains close to the Q1 rate".

The Bank added that financial market assumptions for just one rate rise to 0.5% in 2020 would not be enough to rein in inflation.

Instead of its usual nine members, the MPC only had eight members attending the May meeting, as the Bank is yet to replace Charlotte Hogg, its former deputy governor.

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