The pound opens this morning at an 8 month high against the euro after the Bank of England kept its policy settings unchanged yesterday and declined the opportunity of giving the markets any further guidance on future policy.
The Monetary Policy committee (MPC) of the Bank surprised the markets yesterday by choosing not to comment on monetary policy as they kept UK interest rates at their record low rate of 0.5% and left the asset purchase programme, commonly known as Quantitative Easing (QE) unchanged at a total of £375 billion.
It had been widely predicted that the MPC would add to last month’s first round of guidance under new Governor Mark Carney in an attempt to tame growing market expectations of an interest rate rise. In holding policy unchanged, the MPC issued a brief statement stating that “The committee reached its decisions in the context of the monetary policy forward guidance.”
It was only last month that the MPC started using forward guidance on its policy intentions in an effort to give consumers and employers a firm footing for spending and investment decisions. However, the markets believe that UK unemployment will fall at a faster rate than predicted by the MPC and have sent market interest rates to a 3 year high.
This week has seen the publication of some better than expected economic data across all three major market sectors with the manufacturing, construction and services sectors all registering faster than expected growth rates last month.
The minutes of yesterday’s meeting, released on 18 September will be closely watched as it will show how the nine members of the MPC voted on the key policy issues.
The MPC also announced yesterday that they have decided to reinvest £1.9 billion of cashflows from the maturing of government bonds it holds back in the Bank’s asset purchase scheme.
The US dollar strengthened yesterday afternoon on the back of data showing growth in the US services sector accelerated in August with activity rising to levels not seen since January 2008.
As a result of the recent string of improved economic indicators, the majority of analysts now believe the US economic recovery is strong enough to warrant the start of a tapering of the $85 billion a month stimulus programme by the Federal Reserve when it holds its next policy meeting later this month.
Yesterday afternoon also saw the European Central Bank (ECB) keep its policy parameters unchanged. After six consecutive quarters of negative output, the second quarter of this year has seen a rise in the real GDP in the euro zone but insufficient to persuade the council of the ECB to change policy.
ECB President Mario Draghi warned yesterday that the Governing Council was wary about rising money markets and said the risks surrounding the economic outlook for the euro area continue to lie to the downside. Draghi acknowledged that the euro zone should benefit from an increase in the gradual strengthening of external demand for its exports and the overall improvement in the financial markets but in his own words he remains "very, very cautious" about the recovery stating "The shoots are still very green”.
Today sees the publication of the key employment data from the world’s largest economy, the US which will give a further pointer to the strength or otherwise of the world wide economic recovery.