The pound fell heavily against all 16 of the most actively traded currencies in the market yesterday after the publication of the minutes of the last meeting of the Bank of England's (BOE) Monetary Policy Committee's (MPC) showed a distinct ‘dovish’ stance from the UK’s top economic policy making body.
Whilst the nine members of the MPC agreed to hold both UK interest rates and the size of its bond purchasing program, commonly known as Quantitative Easing (QE) unchanged, the minutes showed that 3 of the 9 members, including Governor Sir Mervyn King voted for a £25 billion increase in the QE budget this time around. In January, the vote had been 8 to 1 in favour of no change so the message seems to be clear.
The MPC are sufficiently worried about the grim economic prospects and outlook for the economy that they are prepared to pump additional funds into the economy to try and stimulate economic growth. One of the side effects of QE is the devaluing effect on the pound which lost another 1% against both the pound and the dollar.
Not by coincidence, in its latest quarterly inflation report, published just a week ago, the BOE revealed that it felt more comfortable with the possibility of higher inflation rates, suggesting these would not fall below its 2% target until 2016.
Commenting on the announcement, economists at Barclays said “Governor King’s vote was the most surprising. He had recently appeared to seek to rein in expectations of more quantitative easing (QE), saying that “generalised monetary stimulus alone … is not a panacea” and “as time passes, larger and larger doses of stimulus are required. It is hard to square these comments with his vote for a modest £25 billion QE expansion.”
Last night, in contrast, the minutes of the last meeting of the Federal Reserve (FOMC) policy meeting were published. The minutes said that Fed officials planned to review its quantitative easing programme in March, fuelling speculation that the central bank may have to scale back or end its bond buying programme before a pick-up in the US employment market. The US dollar rose on the news.
Earlier on, the US Commerce Department reported some mixed US housing data with permits for future home building issued in January rising to a 4 and a half year high. However housing starts fell by 8.5% in January to a 890,000-unit annual rate.