Temporary Rise for Sterling Following BoE Minutes

Recognising the threat that inflationary pressures pose, Spencer Dale has joined Andrew Sentance and Martin Weale in voting for an immediate interest rate rise, reports Caxton FX in response to the publication of the Bank of England’s (BoE) minutes. The pound received a knee-jerk boost following the news, but quickly dropped down from its highs, hovering near US$1.62.

Duncan Higgins, senior analyst for Caxton FX, said: “To a large extent the market was prepared for a three to six vote as inflationary pressures are clearly increasing. Sterling’s initial knee-jerk boost appears to be fading as the market re-evaluates the significance of the vote.”

The minutes revealed that Dale is the third member of the Monetary Policy Committee (MPC) to join the hawkish camp. To an extent the market expected this outcome following the BoE’s Quarterly Inflation Report. Within this, the Governor recognised an unusually diverse array of opinions among the MPC. Causing more of a stir, the minutes also revealed that Sentance actually voted for a 0.50% increase in the base rate as opposed to the more traditional 0.25%.

Higgins added: “Clearly Sentance is ramping up his argument that inflation poses a far bigger risk than the BoE is willing to recognise. It is obvious that the MPC is leaning further toward a rate rise and we could now see a move as early as April. However, so much has now been priced into sterling that upside potential could be limited even with a rate increase; particularly as the negative implications of a higher base rate at this stage of the recovery are still very acute.

“Even a small revision higher would leave growth in negative territory and would therefore be unlikely to sway sentiment toward the strength of the economic recovery,” he concluded.


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