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Division at the MPC….

Division at the MPC….

Today is an important day in foreign currency, particularly for users of Pounds Sterling. The release of the MPC minutes at 9.30 GMT will show how the current dynamics of the MPC are playing up. So has someone else joined the group for a rate hike or not? Well, Vice Chancellor – Charlie Bean has been making some sceptical comments about how much spare capacity (and therefore disinflationary pressure) there is in the economy. The mere rumour that a third person had voted for a rate hike had Sterling strengthening at the tail end of last week. If someone has moved camp and that person was the Vice Chancellor, it would show the extent of division amongst the committee. Whatever the outcome, there is likely to be volatility in the pound as traders digest January’s minutes.

Martin Weale who had joined Andrew Sentance in voting for an interest rate increase in January, reiterated yesterday that an early increase would prevent the need to raise rates faster in the medium term– as the BOE try to manage stagflation – the nasty cocktail of low growth and high inflation. It is worth noting the Bank of England’s remit is to control inflation and not manage growth, unlike their US counterparts at the Fed. Now this is not to say the MPC have ignored slow growth in their decision process – they quite clearly haven’t otherwise rates would have risen by now. The issue for BOE rate setters is that in trying to find the correct balance of managing inflation and supporting growth they find themselves ‘behind the curve’ i.e. monetary policy is not up to speed with the market trend. Remember, the MPC aren’t looking at data releases and saying what does this mean just now, but looking at it and saying what does this say about the overall trend in economy in the medium term. The real fear is that if they react too slowly inflation could become inset. If this were to happen then it becomes much more difficult to resolve and the BOE would have failed to do their job.

In other news from the UK yesterday and public borrowing figures showed the UK is not as poor as first thought – with strong tax receipts meaning January accounts were actually £3 billion in surplus – now those are words that have not been uttered for a while! In early morning trading the pound was trading at 1.6201 with support for the dollar slightly dampened by poor housing data released yesterday – showing the US still faces some headwinds in its economic recovery. Against the euro the pound was relatively unchanged at 1.1805 with speeches from ECB members including the president likely set the tone for Europe’s

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