BOE: Worried About the Pound?

A Fragmented BOE

On Wednesday, the BOE released the minutes of its most recent meeting. As expected, the report revealed that policymakers are still split on whether or not they should increase the bank’s asset purchases.

The division remained still at 6-3, in favor of those who vote against any increase. Meanwhile, BOE Governor Mervyn King, Paul Fisher, and David Miles stuck to their guns and continued to call for a 25 billion GBP increase in the bank’s asset purchase program.

The Pound’s Unwanted Decline?

What caught the market’s attention though was not the split decision on quantitative easing though. Rather, it was the part where policymakers expressed their concerns about the pound’s rapid decline.

Since January, the currency has lost approximately 7.73% against the dollar. Apparently, most central bankers feel jittery that any increase in asset purchases would further lead to an “unwarranted decline of the sterling.”

Of course, this caught almost everyone by surprise as the statement runs contrary to what Mervyn King said a few weeks ago. In a speech, the central bank head honcho remarked that a weaker pound could prove to be beneficial to the U.K.’s export sector and therefore, the economy.

High Inflation

Another major issue that is making BOE policymakers reluctant in engaging more stimulus is the rising inflation rate. The most recent CPI report showed that average price of consumer goods and services for February rose 2.8%. This is the highest increase it has posted in 9 consecutive quarters.

In addition, analysts also predict that the inflation rate will go even higher this year, possibly above 3% in the second half. They also expect that it will probably stay that way until 2014. Take note that the BOE’s inflation target is only 2%.

Market Reaction

The BOE meeting minutes were certainly less dovish than the previous one, which was a huge surprise to market participants. As a result, immediately after the minutes, the pound skyrocketed versus the dollar. From GBP/USD‘s intraday low at 1.5035, the pair rallied as high as 1.5187 before retracing some of its gains.

After seeing the pair’s strong rally, the question that is probably on everyone’s mind is whether the minutes would completely change the course of the pound. Is the meeting minutes the catalyst the pound needs to finally stage a true reversal? Let me know what you think by answering the poll or leaving a comment below!