The recent release of the MPC minutes has given the pound a
major boost. Adam Posen, the policymaker who has so often stood alone as the
Bank of England’s arch dove during his 19-month tenure, has seemingly abandoned
his quest for further quantitative easing. Two votes became one then, with only
David Miles seeing fit to vote for a further £25bn in asset-purchases, though
he stressed the decision was “finely balanced. “
The last quarterly inflation report assumed a fairly steady
downtrend in UK inflation but the MPC is now noting higher medium-term
inflation risks, which reduces the attractiveness of further QE. Higher
inflation requires tighter monetary policy. For David Miles, the threat of a
third consecutive decline in UK growth and another technical recession looms
too large and he voted for extra £25bn of QE accordingly. Clearly, next week’s
Q1 UK GDP figure will be crucial and the risks of another negative reading are
significant, though we expect a minor uptick. April’s PMI surveys from the UK’s
manufacturing, construction and services sectors were very encouraging and the
recent UK labour statistics also provide room for optimism.
The BoE does appear to be moving away further monetary
easing at present but the UK economy remains distinctly fragile. Many market
players will be assuming further QE is now off the table but if inflation eases
towards the end of the year and growth remains weak, dovish arguments will once
again come to the fore. What’s more, the eurozone debt crisis could force the
BoE’s hand if the situation in Spain and Italy deteriorates rapidly.
There is also the issue of Adam Posen’s thinking – whether
he has really given up on more asset-purchases. There are strong arguments that
Posen merely saw fit to let the current round of QE run its course, before
reassessing the need for a top-up in May, by which time the BoE’s inflation
projections will have been formally updated and we will know whether the
British economy has suffered the dreaded ‘double-dip.’ Only time will tell on
this issue, but it’s fair to say the market may have jumped the gun in respect
to Posen’s ‘change of stance.’
Regardless, the majority of the MPC appear far too concerned
with upside risks to inflation, and perhaps preserving the BoE’s credibility on
the issue of maintaining price stability, to step up QE at its next meeting in
May or any time soon. Whilst sterling’s safe-haven status has enabled it to
weather the constant threat of QE hanging over it, it has undoubtedly weighed
on demand in recent months. Sterling has now been freed up to rally in the
aftermath of the minutes, climbing to a 20-month high against the euro and a
six month high against the US dollar. Even higher levels will be seen against
an increasingly weak single currency, though we maintain a negative outlook for
the pound against the US dollar.
Sterling holds onto gains despite confrirmation of UK double dip » « April Currency Report
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