MPC minutes lift sterling from its lows

August Monetary Policy Committee minutes revealed a vote of eight to one in favour of maintaining the base rate of interest at 0.5%.

Andrew Sentance remained the sole dissenting voice among the ranks, voting for the third consecutive month to raise rates by 25 basis points. It was also a unanimous vote to keep the quantitative easing budget unchanged at £200 billion. This had been a point of speculation in the market over the past couple of days, with rumours suggesting that a couple of members saw conditions fit to extend the budget. However, the doves among the committee chose to sit on their hands when it came to the vote.

Duncan Higgins, senior analyst at Caxton FX commented, “The minutes have given the pound a slight nudge higher with rumours about further quantitative easing proving unfounded, at least for the time being. Clearly Andrew Sentance has failed to rally any further support for a rate rise. The general consensus remains that inflation doesn’t pose a significant enough threat to warrant to a change in policy.”

Following on from the recent Inflation Report, the minutes offer little in the way of fresh insight. The members of the committee appear content that current policy is ‘appropriate to balance the risks to the inflation outlook in the medium term.’

“Through the last couple of months it has become increasingly clear that the Bank is not yet ready to tighten policy, regardless of inflationary pressures. If anything, the minutes reveal a growing willingness to expand monetary policy should the balance of risks necessitate it,” continues Higgins.

In response to the minutes, the pound has moved comfortably back above 1.21 against the euro and $1.56 against the dollar.

Higgins concludes, “There is a sense that the market went too short on sterling in anticipation that at least one member of the Committee would’ve voted to extend QE. The market is now buying back sterling on the view that policy is set to remain unchanged for the near future.”