Inflation, BoE and effect on Pound exchange rates.

Good Morning. The pound fell from it’s recent highs yesterday after the Bank of England minutes showed a split in the decision to increase the Quantitative Easing measures. At 08:30am this morning, rates are as follows:

  • GBP/EUR 1.1210
  • GBP/USD 1.6675
  • GBP/AUD 1.8088
  • GBP/NZD 2.2716
  • GBP/CAD 1.7680
  • GBP/JPY 148.34
  • GBP/CHF 1.6956
  • GBP/ZAR 125162
  • EUR/USD 1.4868

Bank of England Minutes
The Bank of England’s Monetary Policy Committee (MPC) was split three ways in November over whether to increase its quantitative easing (QE) scheme – the first time members have voted in three different directions since the controversial policy began in March.

Spencer Dale, the Bank’s chief economist, in his first dissent from the majority since QE began in March, voted for no increase at all, arguing that pumping more money into the economy might fuel “unwarranted increases in some asset prices that could prove costly to rectify.”

In contrast, David Miles, who joined the MPC in June this year, called for QE to be increased by £40 billion in “order to provide greater insurance to the downside risks to growth and inflation”.
The split highlights a growing concern that the programme, where the Bank “prints money” and uses it to buy assets such as bonds, was stoking inflation.

What does this mean?
The door is clearly not shut on further quantitative easing. Nevertheless, with the economy almost certainly returning to growth in the fourth quarter, we suspect that November marked the final extension to the quantitative easing programme. The committee also discussed whether to cut the interest the central bank pays private banks for holding their cash deposits, in a bid to encourage them to lend the money rather than sitting on it, but decided that they did not want to do this at the present time.

So, inflation is rising, and this usually signals that interest rates will go up. If interest rates go up, Sterling becomes more attractive to investors, more people buy Sterling and the currency strengthens and exchange rates rise.

It’s not that simple however. Despite inflation rising, most analysts expect our interest rates to stay at record lows well into nex year. As mentioned above the BoE are actually considering cutting the rate for banks, and so the rise in inflation is unlikely to cause rates to rise as it usually would.

This is reflected in the drop in rates after the minutes were released yesterday.

Todays Data
For the UK, we have Retail Sales, Money Supply, and Public Sector Borrowing. The Retail Sales are the figures to watch. Expect a monthly rise of 0.6% and an annual rise of 2.9%. And different, and the pound will likely change in value.

We also have a speech by the European Central Bank President.He gives a press conference as to how the ECB observes the current European economy and the value of EUR.

His comments may determine a short-term positive or negative trend. If he shows a hawkish outlook, that is seen as positive (or bullish) for the EUR, while a dovish is seen as negative (or bearish).

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