GBP/EUR steady but USD falls
As expected, the Bank of England kept rates on hold at 0.5% for another month, with spiralling UK inflation not enough to convince the MPC to change direction. As ever, it won’t be until the minutes are released in a couple of weeks that we see how each member voted with the previous meeting voting 6-3 in favour of keeping rates on hold.
Being the rather sad person I am, I read the Bank of England minutes last month and would suggest that the two different camps may have become entrenched – with the six voting to keep rates on hold wanting to see a consistent improvement in the UK economy before joining the rate hike camp. With the raft of UK releases in the last week providing mixed signals on the state of the UK economy, it raises the question of whether other MPC members will be convinced to switch sides in the near term.
That said, if inflation remains at these elevated levels for longer than the BOE expected and if they do nothing to tackle it, people will start to see higher price increases as the norm. If that was to happen then people, despite the difficult job market will increase pressure for higher wage increases. The Bank of England is treading a very dangerous path if wage increases do start compensating for higher prices, as inflation starts to become inset and even more difficult to tackle.
Across in mainland Europe and the European Central Bank has taken a tougher stance on inflation. Yesterday, the central bank raised interest rates to 1.25% despite the fact that Portugal has just asked for a bailout. Jean Claude Trichet, the ECB president, responded to a question about Portugal at the press conference stating that the decision was for the “price stability of 331 million European citizens”, which can be translated to 88 million Germans.
In overnight markets, the pound was slightly lower against the euro at 1.1379, with the ECB rate decision not making too much of a difference as it was already largely factored in by the market. The pound has retraced the highs of a couple of weeks ago against the dollar with it testing the physiological important 1.64 level.