Today’s UK retail sales data for the month of February suggest that the MPC was correct to keep the BoE interest rate fixed at 0.5%. The figure showed a 0.8% contraction in sales volumes, causing alarm bells to ring with regard to the UK economic recovery.
With consumer confidence at an all-time low (according to data compiled by Nationwide) and consumer prices at lofty heights, the poor sales figure is easily explained. Higher central interest rates would mean higher borrowing costs for the UK’s already heavily indebted consumer. So despite the shocking UK inflation data released on Tuesday, the MPC really cannot afford to tighten policy when the UK recovery is on a knife-edge. This may well convince those investors betting on a May BoE rate rise to adjust their positions.
What has this meant for sterling? Well, it has fallen across the board. A figure like this makes a rate rise for May all the less likely, particularly with yesterday’s MPC minutes displaying no significant increase in hawkish rhetoric. Furthermore it paints a gloomier picture of the UK economy moving forward, which was also brought into sharper focus yesterday as Osborne announced a downward-revision of the UK’s GDP projection for the year in during the annual Budget.
In addition to today’s sales figures, another factor adding to sterling’s decline has been some negative comments from Moody’s directed at the UK economy. The credit agency stated that the UK’s AAA rating could be cut if the government’s austerity measures threaten growth prospects. It seems a little cruel for the market to have responded so harshly to the comments given the rating cuts that have hit the eurozone left right and centre in recent months. Then again the pound does not enjoy the luxury of consistent demand from Far and Middle Eastern sovereigns looking to diversify their reserves.
Looking forward to next week, sterling has little on the horizon that looks likely to transform its appeal. We may have to wait until after the ECB rate rise (almost certainly on 7th April) for the pound’s potential to gain recognition. It will then be the BoE next in line.
Richard Driver
Analyst – Caxton FX
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