Thursday, March 08, 2007
How close was the vote?
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

The Bank of England's monetary policy committee (MPC) duly left Bank rate at 5.25%, which will have calmed some nerves. Whether the MPC is still on course for the hike to 5.5% signalled in the February inflation report remains an open question. Some of the data remains quite strong - the Halifax reported a 1.8% February rise in house prices, which pushed the annual rate back up to 9.9% - but this feels less like an economy roaring away than it did, and inflation is falling. Goldman Sachs, for one, thinks 5.25% will prove to the be the peak. The closeness or otherwise of the vote, to be revealed in 13 days' time, will be an important signal.

The gap between UK and European interest rates has narrowed to 150 basis points (1.5 percentage points) following the European Central Bank's hike from 3.5% to 3.75%. It is unlikely to narrow much more; 4% looks like the probable peak.


That over 10% of economists expected a rate hike today was enough for sterling to sell off when the BoE stayed pat. I'm inclined to agree with the GS thesis unless with get some particularly bad news on prices, but that wouldn't be my base case. I look forward to the minutes.

Posted by: Caravaggio at March 8, 2007 03:40 PM

I presume that the BOE will be fighting inflation on account of the yen restoring its strength, ie sterling selloff for yen.

That is probably what happened when the BOJ increased interest rates to 0.5% and the sterling fell to 1.92 to the dollar, and is hovering around 1.93 currently with the pattern showing no strength in the fiat sterling.

The downward movement will be more emphasised when the BOJ keeps on increasing rates and the base rate will have to move up in the UK.

I vote for the nominal interest rate hike in the next MPC meet.

Posted by: Hitesh Damani at March 10, 2007 10:18 AM

Judging from the lack of inflationary fall out when the UK left the ERM in 92, I think the pound (trade-weighted) wouldn't rank highly as a factor in the MPC's decision making process. It would be a factor for consideration, and may be a marginal factor in tipping a decision one way or another, but I think this would be rare. If you look at the minutes, you can see it is generally discussed in passing.

This time around it's not so much the fall in cable as it is the rise in EUR/GBP that will have dragged the trade-weighted index down (it has a much higher weighting) over the past month. But, relative to almost all PPP calculations and from a historical perspective, the pound is merely giving back some of it's strength and I think it would have to fall a lot further to be considered weak.

Posted by: Caravaggio at March 10, 2007 12:11 PM