Bank of England Minutes Reveal Few Surprises; Sterling Outlook Murky

The Bank of England released its minutes from its July meeting this morning which showed that the governing council voted 7-2 to maintain its benchmark interest rate at 0.50% as most members of the MPC felt that the recent softening of data meant there was less need for tightening of monetary policy in the short-term. The governing council also voted 8-1 to keep its asset purchase plan at 200 billion pounds.

Expectations have been lowered in recent months for tightening action from the Bank of England as growth hit a ‘soft patch’, the central bank minutes reflected this sentiment saying “it was likely that the current weakness in activity would persist for longer than previously thought” continuing to say that “recent developments had reduced the likelihood that a tightening in policy would be warranted in the near term”. We believe that the central bank will raise rates around the end of the year, most likely in December, while Ernst & Young’s Item Club this morning forecast a November rate hike.

On the inflation front the central bank moved to say that it was now “likely” that CPI will peak above 5% in coming months raising their forecasts yet again and adding that it is likely to peak “sooner than the committee had previously expected”. However, the MPC maintained their outlook that “with the continued subdued behavior of earnings…reinforces the case that inflation was likely to fall back once the temporary impact of the factors pushing up on it had waned”.



The most notable omission was the lack of any real mention of the governing council mulling further measures to support the economy through its ‘soft patch’ by printing more money to expand their asset purchases. Even as the minutes reveal that the MPC expect “some softening” in Q3 UK GDP, at present the governing council seems unwilling to artificially support the economy further.

Bank_of_England_Minutes_Reveal_Few_Surprises_Sterling_Outlook_Murky_body_gbp.png, Bank of England Minutes Reveal Few Surprises; Sterling Outlook Murky

As a result of this omission the pound was moderately better off against the buck as fears waned of imminent further quantitative easing by the central bank. The outlook for the pound is rather murky at present, even as it consolidates its corrective move back above the psychological 1.6000 move. The downside in Gbp/Usd still looks vulnerable and the multi-month low posted last week may well serve as a downside target for Gbp bears. However, balancing the outlook is the fact that the UK is not dealing with a serious crisis like its major peers are; Japan overcoming the earthquake and tsunami, the EMU with its periphery debt crisis and the US with its debt ceiling. As such, investors could elect to buy into the pound considering its relative health against its major trading partners, despite its own soft growth prospects. We find ourselves with a bearish bias for the pound, particularly against the buck and expect the 1.6000 level to be broken again soon opening the door to the next leg down in Gbp/Usd.

Written by Jonathan Granby, DailyFX Research Team

source : Dailyfx.com