It seems from yesterday's MPC minutes – the meeting to which was crucially held prior to the release of our shock GDP figure - that the balance of power between the hawks and the doves has shifted. The idea of raising interest rates to combat rising inflation - estimates of which reach to 5% by end of the year thanks to the triple whammy of high energy prices, import costs and the VAT rise - is increasingly on the agenda.
The anticipation of raising interest rates was enough to boost sterling at the beginning of the month. However, with negative economic growth, stagflation is fast becoming the new buzzword and any further rally for sterling has been well and truly checked.
Imagine if you will, if on the 13th January, the 9 member committee had voted for a quarter point increase in the base rate. Borrowing costs on the rise, just as the word double-dip is reintroduced to every editor trying to flog their paper. Panic? Probably, yes.
To this end King was probably correct in keeping monetary policy loose, at least for now. After all, how is a UK based rate rise going to curb rising fuel and food costs exactly?
King is walking a very fine line at the moment; keeping interest rates low for too long could inevitably lead to longer term problems for the economy; raising them too early and what little confidence there is in an already weak economy would be eroded.
To be fair, the paper floggers may be jumping on the bandwagon to a certain extent; are we facing a double dip? Not yet, at least not technically – we would need to see 2 quarters of consecutive contraction first. The GDP figure that is causing all this mischief for the pound (as I detailed in my previous blog post) could still be revised up. The weather, the volatile nature of data when emerging from recession, and the fact that the 0.5% figure only accounted for 40% of surveys issued heightens the possibility that the figure will be revised. The second estimate (not due until Feb 25th) could offer a more uplifting figure for the policy members to get their teeth stuck into. The pound meanwhile hangs in the balance.
Edward Knox
Analyst
For the latest forex news and views, follow us on twitter @caxtonfx, and sign up to our daily report.
Imagine if you will, if on the 13th January, the 9 member committee had voted for a quarter point increase in the base rate. Borrowing costs on the rise, just as the word double-dip is reintroduced to every editor trying to flog their paper. Panic? Probably, yes.
To this end King was probably correct in keeping monetary policy loose, at least for now. After all, how is a UK based rate rise going to curb rising fuel and food costs exactly?
King is walking a very fine line at the moment; keeping interest rates low for too long could inevitably lead to longer term problems for the economy; raising them too early and what little confidence there is in an already weak economy would be eroded.
To be fair, the paper floggers may be jumping on the bandwagon to a certain extent; are we facing a double dip? Not yet, at least not technically – we would need to see 2 quarters of consecutive contraction first. The GDP figure that is causing all this mischief for the pound (as I detailed in my previous blog post) could still be revised up. The weather, the volatile nature of data when emerging from recession, and the fact that the 0.5% figure only accounted for 40% of surveys issued heightens the possibility that the figure will be revised. The second estimate (not due until Feb 25th) could offer a more uplifting figure for the policy members to get their teeth stuck into. The pound meanwhile hangs in the balance.
Edward Knox
Analyst
For the latest forex news and views, follow us on twitter @caxtonfx, and sign up to our daily report.
