Yesterday, the Bank of England (BOE) released the minutes of its most recent policy meeting. The minutes revealed that all 9 voting members opted to maintain the bank rate at 0.50% but there was a minor disagreement with regards to the expansion of its asset purchase facility.
One member, namely David Miles, preferred to increase the size of the program by a further 25 billion GBP to a total of 400 billion GBP. In spite of Miles’ dissent, the central bank went ahead with the decision to hold off on further easing.
The market minutes was pretty much what market participants had expected. What caught them off guard, however, was the intense argument surrounding the impact of the central bank’s quantitative easing program.
According to the minutes, “there was a question over the magnitude of the impact of lower yields and higher asset prices on the broader economy” and that “views differed over the exact impact of the MPC’s asset purchases.”
On the one hand, some policymakers feel that a case could still be made for further stimulus the Q4 GDP will probably show contraction. But on the other hand, they are also wary about the rising inflation.
The latest inflation forecast shows that inflation will likely remain higher than the central bank’s 2% target for the next one and a half years to increasing college fees and energy and food prices.
BOE Governor Mervyn King also indicated in his inflation report last week that even though the door is open for more bond-buying, monetary policy could only go so far in helping the economy adjust to weak growth and austerity programs.
In a nutshell, the minutes of the latest BOE meeting were hawkish for the pound as most policymakers seemed unwilling to increase stimulus in the near future. Although this was a result of inflation concerns more than an actual improvement in the U.K. economy, it was enough to send the pound higher across the board.
Check out how pound pairs reacted to the release of the minutes yesterday:
As you can see, GBP/USD jumped close to the 1.5950 minor psychological level right after the release. It’s now cruising at its highest level in two weeks. Meanwhile, GBP/JPY rallied to its highest level since April this year, as it surged by 150 pips from 130.05 to 131.55.
This price action suggests that the pound’s strength was mostly a result of decreased expectations of an interest rate cut. Nevertheless, its movement could become data-dependent in the coming months as weaker-than-expected economic figures could still push the central bank to pump up their stimulus efforts.
On the other hand, a strong rebound in GDP for Q4 could support the BOE’s anti-QE rhetoric, which could be bullish for the pound. For now, let’s wait and see what’s going to happen next.