Yesterday’s MPC minutes dropped a bit of a bomb as far as we are concerned. They revealed that three MPC members (Posen, Fisher and King) have joined David Miles in voting for another round of quantitative easing. Posen was bound to vote for more QE after backtracking in light of weak recent UK growth data. That was as far as we saw the voting pattern shifting really, so the extra two votes came as a surprise.
The language of the MPC minutes were decidedly dovish and given that the UK inflation rate has surprisingly eased to 2.8% (from 3.0%) since the last meeting, we expect at least one other MPC policymaker to join the dovish ranks in July, and that is all that will be needed. The fact that BoE Governor King will be there to lead the doves makes a QE majority all the more likely, as will the intensifying risks out of the eurozone.
The following quote tells you that more QE in July is pretty much nailed on: “most members judged that some further economic stimulus was either warranted immediately or would probably become warranted in order to meet the inflation target.”
Amid plenty of speculation that the Bank of England could cut the base rate from the current record low of 0.5% for the first time since March 2009, it is interesting to note from the minutes that whilst the MPC did discuss the merits of a rate cut, they saw no advantage in doing so at the present time.
Sterling has weathered this week’s QE storm very well, not least because, thanks to the global economic downturn, there are very few currencies without risk-factors surrounding them. The dollar has suffered considerably from QE3 speculation, which the Fed has made clear it could opt for this year, whilst the euro has more problems than this blogger has time to allude to. All in all, sterling actually held up pretty well during the last round of QE and given that another round of QE will by now have been fully priced in, it shouldn’t be too much of weight on sterling moving forward. Fortunately for GBP, the market is rather more concerned with the Grecians.
Richard Driver
Analyst – Caxton FX
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