What Say You, BOE?

In their previous rate statement, the Bank of England (BOE) stuck with its usual dovish monetary policy stance as they kept their benchmark rate unchanged at 0.50%. Policymakers also voted to maintain their asset purchase facility at 200 billion GBP as they weighed the possible effects of austerity measures on the British economy.

This time around, the central bank is expected to whistle the same cautious tone now that the government has started to put some belt-tightening policies in place. The UK may have enjoyed a run of upbeat economic reports lately, starting from their better-than-expected retail sales figure to their surprisingly strong GDP reading, but BOE officials might just brush these aside. Word on the street is that the UK isn’t likely to maintain this pace of improvement when the austerity measures start to take effect.

Judging from UK’s figures, it still seems that their economy could put up a good fight in face of spending cuts and tax hikes. Let’s take a quick glance at some of these, shall we?

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First, the bank has been downplaying the strong consumer price index readings since the beginning of the year. This is quite odd, considering that the BOE’s main objective is to make sure that inflation is at a level close to, but below two percent. It’s right there on the bank’s website! Take a look!

Second, consumer activity seems to be faring much better. After decreasing by 1.8% in January, retail sales have been constantly in the positive territory, rising by 0.4% in February, 0.3% in March, 0.6% in April, and 0.7% in June. One month’s data might not make a trend, but I think four consecutive monthly increases do!

And finally, there’s also the slight improvement in UK’s labor market. Although admittedly still high, unemployment in the country has fallen to 7.8% after topping out at 8.0% in March and April.

With these positive figures, I’m betting that Monetary Policy Committee member Andrew Sentance is dancin’ on his tiptoes. Remember that for the last two months, he has been the only MPC member to push for an interest rate hike. It’s just too bad that tomorrow at around 11 am GMT, people are expecting to hear more of BOE’s dovishness. This could hamper the pound’s gains (and Sentance’s party) for a while, but I think that the aggressive rally in risk appetite would eventually bring the sexy pips back.

After all, the pound did gain against the dollar for the ninth consecutive day yesterday. The last time this happened was in November 2004, when I was still bustin’ my moves on Black Eyed Peas’ “Hey Mama!”

Cable also soared by 1,800 pips or a whopping 12% upsurge since the middle of May. I don’t know about you, but from where I’m standing, it looks like the BOE will have a hard time convincing markets that UK’s economy is about to get ugly in the coming months.