Bank of England dissent triples as three vote for rate hike
Alongside expectations, the Bank of England held interest rates at record lows of 0.25%. Nonetheless, Kristin Forbes, who has in the past been a lone dissenter on the MPC, was joined by Ian McCafferty and Michael Saunders in voting for a rate hike. Why did they do it? In a word, inflation. CPI growing at close to 3% isn’t a healthy economic scenario. It’s been four years since prices were rising this quickly, directly causing consumer purchasing power to deteriorate. This, coupled with very, very low earnings growth, means that on average, UK workers are getting poorer – which should begin to materially show in retail sales, consumer confidence and GDP figures later this year.
One way that three members of the board believe they can combat this inflationary spiral is through hiking interest rates. Immediately. While this wouldn’t have an immediate impact on earnings growth or headline inflation (the so-called monetary transmission mechanism, the process by which interest rates affect the real economy, can take as much as two years) it would have a strengthening effect on the pound, making foreign imports cheaper and reining in at least that source of inflation. The pound rallied sharply upon the release yesterday, rising close to 1% against both the dollar and the euro. The 5-3 split was certainly more hawkish then markets were expecting – consensus was for a 7-1 vote.
Hawkish BoE may not be here to stay
The next MPC meeting in August (which last year was marked by a rate cut and an extension of quantitative easing in both government and corporate bond markets) will certainly prove interesting as we see the next Quarterly Inflation Report and updated inflation and growth forecasts. Despite yesterday’s 5-3 vote, it’s not safe to assume that the Bank of England are now turning towards higher rates; Kristin Forbes, probably the BoE’s most hawkish official, has reached the end of her term and, as yet, we don’t know who’s replacing her.
Bank of Japan hold fire, yen weakens
Following Wednesday’s rate hike from the Fed, the Japanese yen was already suffering, and those losses extended overnight as the Bank of Japan committed to its promise to maintain aggressive stimulus until inflation is within target. The yen’s now fallen over 2% since the Fed’s decision and given the Fed’s rate-setting committee’s willingness to look through near-term inflation, there’s no reason to believe that this USD/JPY rally won’t be maintained.
Today’s a light session in terms of European data, but in the US building permits and housing starts numbers will draw focus ahead of the University of Michigan confidence survey at 1500BST.