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BoE Gives GBP Brief Pre-Election Lift

Published 04/23/2015, 05:53 AM
Updated 07/09/2023, 06:31 AM

For all the fluff and bluster of the electioneering taking place outside the Bank of England, inside, little has changed. Yesterday’s minutes showed that the Bank of England remains quietly optimistic on the UK economy, noting the upgrade to growth in Q4 to 0.6% and for the whole of 2014 to 2.8% despite some more recent weakness in activity data. Household spending is expected to recover in Q1 from a poor Q4, with the election expected to make little impact on upcoming investment into the UK economy.

Unanimous on rates and QE but some seem to be looking higher

There has also been little change in monetary policy thinking although the news that all members of the MPC viewed a hike as the most likely next move has eliminated market fears that Chief Economist Andy Haldane will be voting for a cut anytime soon. Likewise the news that two members saw the decision as finely balanced seems to show that Messrs Weale and McCafferty will be back voting for hikes soon – maybe as soon as after the election.

For now, however, inflation remains low – yet is expected to recover by the end of the year – growth is solid yet unspectacular and unemployment is moving below pre-crisis levels. The Bank is happy to not rock this boat just yet.

Sterling took a little run higher on the announcement and managed to get above the key psychological levels of 1.50 in GBP/USD and 1.40 in GBP/EUR in the afternoon session. I didn’t think we would see a pound this strong pre-election and I am still looking for political weakness to take it lower in the short-term. One comforting factor from yesterday’s minutes seems to be that it is largely the political overshadowing that has been a negative on the UK economy in the past few months and that some semblance of normality will be restored soon.

South Seas stimulus

The same cannot be said for the NZD, which is down 1.3% overnight. Reserve Bank of New Zealand Deputy Governor McDermott said in a speech yesterday that monetary policy within New Zealand would remain stimulatory and they are not considering any rate hikes at this time. New Zealand has yet to join the assembled ranks of central banks that have cut interest rates or loosened monetary policy this year – I make it 27 that have – but may be moving closer to doing so. Much like the Reserve Bank of Australia, they are relying on verbal intervention to do the job at the moment and will revert to cutting rates if performance is seen to be lacking. That being said, the market is only pricing in a 6% chance of a cut at the meeting on April 30th and only a 49% chance of a cut in the next six months.

Swiss unable to fight a weak euro

Swiss franc continued its recent run of strength despite the SNB’s decision to subject more deposits held within the country’s banking system to negative interest rates. Unfortunately, a slight charge on the currency is nothing compared to the weakness in the euro that the European Central Bank’s QE program has caused or a Greek exit from the Eurozone could bring about.

The day ahead

Following a poor number from the Chinese manufacturing sector – the lowest in a year – we await similar preliminary numbers from the French and German manufacturing and services sectors this morning. Both are expected to show that the two largest economies in the Eurozone have retained strength and growth in the past month across both industries. We also receive the latest retail sales announcement from the UK. Once again we are looking for a strong consumer picture as retailers benefit from shoppers that are seeing real wages rise at the fastest rate since 2008. March’s numbers will also be closely watched for any signs of a pre-election slowdown although we think that this will be negligible. The release is due at 09.30.

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