Whoa, wait a second there buddy! Just when we thought late last year that the BOE would go all Buckingham Palace Guard on us and not shift its monetary policy stance, it seems that one by one, MPC members are now joining the flock of the hawks!
Word is that long-time hawk Andrew Sentance has found another person to take a sip of his rate hike Kool-Aid, as Charles Bean is said to have voted for a rate hike. This comes after last month’s minutes revealed that Martin Weale decided to vote for tighter monetary policy as well.
For those of you who aren’t familiar with the situation of the BOE, Sentance has long been the lone wolf in the let’s-raise-interest-rates camp. For months, he’s pointed to rising inflation and has called for the MPC to adapt more quickly. Now that he’s got two wingmen by his side, the BOE is one more step closer towards actually hitting the markets with an interest rate hike.
Now, if you’re the type who needs hardcore data before you make a decision, then let’s take a look at what recent data would suggest about the U.K. economy.
First of all, there’s the U.K.’s ballooning inflation rate. The country’s CPI figure is currently sitting at 4.0%, which is twice the BOE’s target pace. The BOE believes that higher value-added tax (VAT), energy, and import prices are currently raising price pressures, and that inflation will only ease two to three years after the impact of government austerity measures kick in.
In other news, the retail sales report released last week revealed that sales rose 1.9% in January after falling 1.4% in December. The figure not only exceeds expectations for a 0.5% increase, but is also the best figure in twelve months!
This has gotten a few optimists to believe that last quarter’s disappointing GDP figures were a mere aberration. Just to refresh your memory, GDP declined by 0.5% for the fourth quarter of 2010, which is a lot worse than the third quarter’s 0.7% growth and the expected 0.5% rise. However, given last week’s red hot retail sales report, some believe that the worst is over and that the economy will start picking up very soon.
While talks of inflation and its implication on interest rates have been making headlines and lifting the pound in recent weeks, I really wonder whether if it is enough to earn a go signal for a rate hike from the rest of the BOE.
Last week, it seemed that BOE Governor Mervyn King all but killed all hopes for a rate hike in the near future. Like a broken record, he reiterated his belief that inflation should fall below the BOE’s target of 2.0% in time.
He told people not to get ahead of themselves because unlike what many have been led to believe, the BOE is NOT laying the ground for a rate hike. As a matter of fact, he even said that the central bank will pay little mind to current inflation and will be basing its monetary policy decisions on the medium-term inflation outlook. Sounds like a dove to me!
The truth is, we can’t really count out the doves from the rate hike fight just yet. Adam Posen may be the lone perma-dove as of the moment, but Sentance, Weale, and Bean will still be facing an uphill battle as the other MPC members may not be as hawkish as the Three Amigos.
At this point in time, other BOE members are probably still waiting for the full effects of its austerity measures to kick in. That being said, we should probably take our cue from them and employ the same wait-and-see approach they love so much.