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Currency Report : Bank of England Minutes See Sterling Exchange Rate Hold Steady

February 23, 2011 - Written by John Cameron

Minutes of the Bank of England’s February Monetary Policy Committee meeting, released earlier today, showed that the UK’s Central Bank is gradually edging closer to raising interest rates. Three members of the nine man committee voted for a rate hike, as Spencer Dale, the Bank’s Chief Economist, joined members Andrew Sentance and Martin Weale in voting for a rate increase. Long-term hawk, Sentance voted for a 50 basis point hike, whilst Dale and Weale favoured a 25 basis point increase.

The minutes also revealed that the nine committee members are closely watching Friday’s revised UK GDP figure for quarter 4 for any change to the previous estimate of 0.5%. Members who voted against raising rates this month suggested that an upward revision to the figure would make them more likely to vote for an increase in rates at the March MPC meeting.

Inflationary pressures are growing in the UK, with the government’s headline CPI measure currently standing at twice the target level of 2.0%. With oil prices rising to their highest level since October 2008 overnight due to the ongoing Arab uprising, this figure is likely to climb as 2011 progresses, placing added pressure on the Bank’s MPC members to tighten monetary policy.

Some analysts suggest that a hike in UK rates would have a limited effect as rising UK prices are largely due to the worldwide rally in commodity prices. They suggest that, with 2.5m people unemployed in the UK, a hike in rates would simply serve to make a bout of UK stagflation more likely.

The release of the minutes initially provided some support for the Pound in the currency markets , however Sterling has since given up most of these gains and is currently trading broadly in line with its pre-release levels against the majors. With futures markets factoring in 88 basis points of UK rate increases over the next 12 months, the danger for the Pound is that as investors digest the minutes, they may conclude that they do not contain enough evidence of a near-term rate hike to justify these market expectations. If this turns out to be the case, then Sterling may suffer renewed selling pressure.

The GfK Consumer Confidence Survey for February, released in the early hours of Friday morning, provides the next significant event risk for Sterling in the lead up to the potentially market-moving revised quarter 4 UK GDP figure which is released at 0930hrs on Friday.

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