So, as the market had more or less anticipated, a third MPC member has jumped on the hawkish bandwagon. In the BoE minutes, released today, it was revealed that Spencer Dale was the latest member to recognise the threat of rising inflation, throwing his hat in the ring with arch hawk Andrew Sentance and Martin Weale in voting for an immediate interest rate rise.
Much of this had already been priced into the market as analysts deciphered clues from speeches given throughout the last few weeks; in particular Mervyn King’s acknowledgement last week that there was an unusually diverse array of opinions amongst the Committee.
Perhaps then the market was slightly underwhelmed when the results showed a 3-6 split, with sterling briefly enjoying a knee jerk boost before dropping back again against the euro. The pound did however enjoy a rally against the US dollar as the minutes firmed opinion that the Bank of England will raise rates sooner than the Federal Reserve on the back of inflationary pressures, which partially offset ongoing concerns about political tensions in the Middle East and North Africa.
The minutes also revealed that Sentance on this occasion stuck his neck out and ramped up his argument that inflation poses a far bigger risk than the bank is willing to recognise by voting for a 0.50% increase in the base rate as opposed to the more traditional 0.25%. The standard pre-release rumours had covered this eventuality so again there wasn’t too much made of his vote and it’s unlikely to prove any more of a compelling argument for those policymakers still sitting on the fence.
With the hype and drama of the minutes now passed the market’s focus will shift to Friday where the UK’s second estimate of fourth quarter GDP is due. At an initial estimate of -0.5%, most are hoping that there may be an upward revision. However, even if there is it is unlikely to be greater than a factor of 0.2%, leaving the figure in contractionary territory, much to the discomfort of sterling bulls who appear to be losing their preeminent position!
Edward Knox
Analyst - Caxton FX
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