What can I say, sterling is just leaving us with our mouths wide open. After last week’s disappointing production figures, it was easy to assume that today’s employment figures would just meet expectations. However, the light shone brightly on the UK this morning, and not only did claimant count smash expectations, but the unemployment rate dropped to 7.7%. All this does is boost market sentiment and confidence about the UK outlook. Now, as much as the UK has produced outstanding figures, one can only wonder about how this affects the BoE’s stance on interest rates and unemployment.
While it is unlikely that strong August figures will alter the central bank’s view on maintaining loose monetary policy, what should be noted is that the better the UK economy does, the more the market will question Governor Carney’s commitment to keep rates low at least until 2016. Today’s release of employment figures are even more crucial considering forward guidance outlined by the BoE.
Shouldn’t we really be thanking the central bank for its pledge to ensure low rates to promote growth, which considering recent figures seems to be doing the job? Yet you can’t help but ask: what about inflation? Currently inflation is above the central bank’s target at 2.8% and with growing domestic demand you must wonder how much further it can push. One thing we can be certain of is that if the recovery continues to be as robust as we have seen, the central bank may have to re-evaluate policy in order to ensure price stability. Not only will the market be listening attentively to the Inflation Report hearings tomorrow, but they will be also anticipating inflation figures released next week. When the going gets tough will Carney abandon his growth commitment and enforce price stability or vice versa? Either way, it looks like something will have to give.
Sasha Nugent
Currency Analyst
Caxton FX
