The MPC minutes have revealed that all nine members of the Bank of England’s rate-setting committee voted to keep the base rate on hold at the current 0.5% level. Adam Posen remains the sole policymaker voting for further quantitative easing, despite some awful UK employment data released this morning.
The fact that Martin Weale and Charles Bean have dropped their rate hike calls is highly significant; it drives home the message that UK economic prospects are highly uncertain. In light of last week’s quarterly inflation report, Weale and Bean’s defection is not wholly surprising. With medium-term inflation risks very much skewed to the downside, there is now little pushing the BoE to hike rates. The picture is similar to what we are seeing in the US -low growth and a subdued inflation outlook -which is reversing near and medium-term rate hike bets on both sides of the Atlantic.
Another factor persuading the former hawks to change tack is the threat that the eurozone debt crisis poses to the UK economy. Central banks all over the world are reluctant to raise rates amid the current uncertainty in the financial markets; they really don’t know what’s going to happen. Merkel and Sarkozy’s meeting yesterday provided little clarity as to a viable solution to the debt crisis.
The recent second quarterly UK growth figure was undeniably poor and has increased speculation of quantitative easing. However, there is a degree of optimism surrounding underlying growth. The Office of National Statistics estimates that growth would have been half a percent higher in the absence of temporary factors such as the Royal Wedding. The bar for further quantitative easing is set pretty high and July’s services PMI figure will have eased concerns for the time being.
Today’s data from the UK labour market supports the MPC’s dovish stance; at 30k, jobless claims are at the highest we have seen in over two years. At 7.9%, the unemployment rate also erased improvements made over recent months.
Sterling’s losses in response to this morning’s MPC minutes and poor employment data were short-lived across the board. In truth, bets on a near-term BoE rate hike were pretty much non-existent and expectations for a move early next year were sparse. The minutes just confirmed suspicions that the MPC will remain dovish for the foreseeable future. At $1.6550 on the interbank rate, sterling is now at a ten-week high against the greenback, which represents an excellent opportunity to buy dollars.
Richard Driver
Senior Analyst – Caxton FX
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