The MPC meetings minutes were released this morning much, I’m sure, to the embarrassment of policy member Martin Weale who decided to dance to the tune of raising interest rates. He now joins Andrew Sentance – who has been voting for this policy shift for the past 4 months – and will probably be rethinking his decision after the release of Britain’s shock GDP figure.
Mervyn King meanwhile, smug in the knowledge that he refused to bow to inflationary pressures, used a speech yesterday to defend the Central Banks ultra lose monetary policy in the face of high inflation. He reiterated that the economic recovery would be ‘choppy’ (understatement if ever I saw one), and that real wages would be heading lower. I’d imagine that King’s Speech will not have been received quite as well by the public as its multi Oscar nominated names sake.
The question now is; what will become of the pound if these figures are to be relied on? How much of a toll did the weather take on these preliminary results? After all, the economic impact of the snow is extremely hard to quantify. My feeling is that the figure of -0.5% shouldn’t be taken at face value. Certainly the recovery has been blown off course, but we should wait for the second and final estimates before completely reassessing the situation. The figure is at odds with the PMI (Purchasing Managers’ Index) surveys and the National Statistics Office has been wrong before, notably coming in 0.4% wide of the mark in the final quarter of 2009. A similar revision this time around could well be on the cards.
Nonetheless, the pound must still deal with the dual hangover of weak economic growth and high inflation: ie stagflation. This is not a concept that will rest too comfortably for the pound. Whereas the expectation of higher interest rates gave sterling a boost in the early part of the year, that eventuality has lost all credibility. Indeed, the prospect of such a move from the Bank of England looks about as likely as Andy Gray presenting Woman’s Hour.
With key US announcements due today and Friday, the market should avert its attention from the UK economy at least in the short term. However, any lasting relief for sterling will depend on a fresh wave of eurozone concerns or these lowly €1.15 levels could endure for now.
Edward Knox
Analyst
For the latest forex news and views, follus on twitter @caxtonfx.com and sign up to our daily report.
