The minutes of the July MPC meeting reflected the recent slowdown in activity, but the balance of dissenters remained unchanged; two members voting for an immediate rate increase of 25bp and Posen continuing to argue for more quantitative easing. In the discussion that followed it seems that the hawks, even though they acknowledged the recent soft-patch, feared that this would also impact supply conditions. In other words, more long-term unemployment and more factories closing down would mean that the overall potential of the economy is also reduced.
It’s in this area that the main divisions appear to lie. On the other side, it’s also this spare capacity argument that is seen as the main downside risk by those wanting to keep rates steady, namely that: “demand growth would not be sufficiently strong to soak up the pool of spare capacity in the economy”. For both sides, the trouble is that spare capacity is notoriously difficult to measure, knowing both just how much there is at the present moment in time and how it is likely to develop.
The next key focus will be the quarterly Inflation Report next month. The sense from these minutes is that we are not likely to see a significant softening of the Bank’s stance on inflation, not least when it is more likely than not that we see headline inflation move above 5% in the coming months. The Bank will be sweating but, for now, looks unlikely to put rates up whilst the economy remains so fragile. Sterling has largely priced in this scenario and, with rate hikes off the agenda in the US and moving in that direction in the eurozone, rate expectations have subsided substantially as a driver of currencies. The trouble is for sterling is that it’s struggling to benefit from the ebb and flow of the risk trade, the longer-term debt problems of the US and the eurozone - not a million miles away from what could come to beset the UK.(Fx Pro)
It’s in this area that the main divisions appear to lie. On the other side, it’s also this spare capacity argument that is seen as the main downside risk by those wanting to keep rates steady, namely that: “demand growth would not be sufficiently strong to soak up the pool of spare capacity in the economy”. For both sides, the trouble is that spare capacity is notoriously difficult to measure, knowing both just how much there is at the present moment in time and how it is likely to develop.
The next key focus will be the quarterly Inflation Report next month. The sense from these minutes is that we are not likely to see a significant softening of the Bank’s stance on inflation, not least when it is more likely than not that we see headline inflation move above 5% in the coming months. The Bank will be sweating but, for now, looks unlikely to put rates up whilst the economy remains so fragile. Sterling has largely priced in this scenario and, with rate hikes off the agenda in the US and moving in that direction in the eurozone, rate expectations have subsided substantially as a driver of currencies. The trouble is for sterling is that it’s struggling to benefit from the ebb and flow of the risk trade, the longer-term debt problems of the US and the eurozone - not a million miles away from what could come to beset the UK.(Fx Pro)
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