DIRECTOR OF CURRENCY RESEARCH, GFT
TWO or three? That’s the critical question that currency traders will be asking today upon the release of the Monetary Policy Committee (MPC) minutes due at 9:30am. Last week, the market was abuzz with speculation that Charles Bean may have been the third MPC member to join the two Bank of England (BoE) hawks Andrew Sentance and Martin Weale in voting for a rate hike. Today those rumors may be confirmed.
Until recently, Sentance has been the only hawk on the MPC, despite headline inflation that is now double the 2 per cent target rate set by the BoE. In contrast, Mervyn King and other more temperate policymakers remain concerned that any hike in rates could snuff out the nascent UK economic recovery. The UK economy remains in a fragile state and although last Friday’s retail sales showed a strong rebound after a weather-plagued December, the employment situation in January actually deteriorated, with jobless claims rising by 2,400 when a fall of 3,000 had been forecast.
The perilous nature of the UK recovery is the primary reason that the BoE was so circumspect in last week’s quarterly inflation report, noting that inflation risks were “broadly balanced.” King played down speculation over interest rate rises, saying no decisions would be made until future quarterly meetings.
There is no doubt that the UK faces some of the strongest inflation pressures in the G10 universe, but it is far from certain whether a rate hike would be effective in curbing these price pressures. Interest rate hikes tend to work best when inflation is the result of excessive demand, but the latest rise in prices has been caused by supply shocks, most particularly in energy as the turmoil in the Middle East continues to push the price of Brent crude above $100 per barrel. Nevertheless, if the MPC minutes reveal that Bean voted for a rate hike, momentum will shift to the hawks with three out of the nine members looking to hike rates. If the situation in the Middle East begins to stabilise and risk sentiment improves, cable could resume its rally, targeting yearly highs at $1.6279 as the markets assume rate hikes are on the way.