HiFX comments on sterling’s performance following the release of the Bank of England’s minutes
Andy Scott, spokesperson for FX advisory services at foreign currency specialists, HiFX, comments on sterling’s performance following the release of the Bank of England’s minutes:
Sterling given a boost after two votes for an interest rate hike
He said: “Sterling jumped by around half of a percent on Wednesday morning following the release of the minutes from the Bank of England’s meeting this month, due to a surprise in the voting. It was expected that all nine members of the monetary policy committee would have voted to keep rates on hold but two members, Martin Weale and Ian McCafferty, voted to increase rates to 0.75%. Both members felt that it was appropriate to raise rates before wage growth, driven by falling unemployment, took off and to avoid being behind the curve due to the lag in monetary policy. The majority of members, however, felt that there were insufficient inflation pressures for it to be worth taking the risk of raising rates.
“It’s surprising in a way to see members voting for rate hikes already given the external downside risks that have been appearing around the world; whether it’s weak economic growth or geopolitical risk along with soft inflation. Weale and McCafferty must feel a great deal of confidence about the U.K. economy’s ability to remain on its growth path and/or a great deal of concern about future inflationary pressures. After yesterday’s CPI number coming in at 1.6% and several economies seeing disinflation, there doesn’t appear an imminent threat of the latter.
“An initial 0.25% hike would, in reality, probably have little negative effect on the economy; but it’s more the symbolism of a hike that can cause spending to slow, households to cut back and businesses to become more cautious. It’s this tightrope that the Bank of England has to walk between keeping rates low to continue to support the economy after a deep recession and minimal growth, and raising rates to prevent a future build-up of inflationary pressures that would force them into raising rates at a quicker pace than they’re planning. One thing we can be certain of is that they can only go up, and that they are almost certain to do in the coming months.
“Sterling’s reaction was quite interesting as it jumped to day highs against the U.S. dollar and the euro at 1.6678 and 1.2545 respectively, before weakening somewhat. A month or two ago, before Carney proved he likes to provide forward guidance for certainty mixed with additional conditions along the way as he deems necessary, sterling would have jumped higher and likely moved higher through the day. Now though, the markets seem to be saying
“we’re not going to get too caught up in the idea of a rate rise since we’re a lot less certain of one. Carney, at least in the markets’ eyes, appears to be unreliable or at best inconsistent.”
