Is The Bank Of England A Divided House?
The Bank of England (BoE) has turned slightly dovish on the U.K. economy following softer economic indicators released in the last two months.
There was no surprise from the market when the BoE announced on November 6 that it would hold its benchmark interest rate at 0.50 percent and make no change to its asset-purchase facility which remains at £375 billion.
With the release of the minutes of the BoE's Monetary Policy Committee (MPC) meeting on November 19, there will be further insight on how united the central bank's policymakers' stand is before challenging economic uncertainty. When the BoE released the minutes of its last policy meeting, it maintained interest rates at 0.50 percent.
But the minutes also pointed to dissension among the MPC's nine members, as two of them favored hiking to 0.75 percent. Otherwise, the MPC voted unanimously to maintain the bank's quantitative easing (QE) program at £375 billion per month.
The United Kingdom has proven resilient in its recovery, and it is now on a faster track of growth than the rest of Europe. The U.K. manufacturing purchasing managers' index (PMI) surpassed expectations and finished at 53.2.
The forecast called for a 51.5 reading.
Construction PMI did drop below the forecast at 61.4, but all PMIs reading above 50 points to expansion, so even the mixed results are still positive even if there are hints of a potential slowdown.
U.K. employment was one of the main reasons that market participants lost some faith in the ability of the BoE to gauge the health of the economy. After using forward guidance, and putting an employment target in order to raise rates, the economy hit that target sooner-than-expected. The unemployment rate has recovered, but that recovery stands mixed. There are fewer people claiming benefits but the unemployment rate has not moved from 6 percent in the past two months. For reference, the rate stood at 7.4 percent a year ago, and barring the November reading in 2013, it managed to decrease consistently in eight out of 12 months.
Low Inflation Diminishes Rate-Hike Chatter
The Old Lady's Inflation Report released on November 12 continued the dovish stance of the central bank, as inflation targets and rate hikes were kept low. The BoE is expecting a slower rise in inflation that could be below 1 percent for the next six months.
It will be interesting to see to what degree Governor Mark Carney has his hand on the pulse on the economy as year-over-year inflation rose to 1.3 percent. The U.K. cites geopolitical turmoil as well as a worsening of the economies of the European Union and Japan as factors for lower growth.
The GBP/USD continues to face downward pressure as the BoE has turned dovish and placed a lot of focus on the E.U.'s woes. The pair continues to head below 1.56 as policymakers continue to talk about the gloom and specters haunting the U.K. economy.
As 1.48 is the low of 2013 but only fundamentals are driving the price down, the technicals seem to suggest a rise. The BoE appears to be done for the year, and it will return to action after the U.K. federal election in May.
Politics Will Pound Sterling
Political uncertainty will drive the pound in the final quarter of the year and the first quarter of 2015. With so much hanging in the balance for Europe, and with Japan already pushing stimulus, the European Central Bank (ECB) is slated to be the next central bank to jump into the sovereign bond-buying spotlight.
The political shackles on ECB chief Mario Draghi prevent him and the bank from having a significant impact on current events. But worsening economic conditions might prompt Germany to change its thinking insofar as QE is concerned.
With that said, the positive ZEW consumer-confidence survey out of the eurozone's biggest economy on November 18 signals Germans are optimistic about their country's economic future – with austerity as is for now.
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