Bank of England Next Move on Hold

The pound fell close to 1500 pips in the past two weeks, practically shedding every gain the pair had made in the last two years, due to the market's view the Bank of England will cut at the following rate meetings. But would they really do this? The meeting minutes released today does not suggest this, nor does it leave too many interpretations that the bank will abandon its target inflation regime to assure growth. The mandate that the MPC follow is price stability, and that is reflected in the stubborn way that the U.K. has held onto rates above 5.0%.

The vote was split, 7 members voted for a hold, while 1 member, Mr. Tim Besley, voted for an increase. On Tuesday the market sold the pound lower directly after voting Monetary Policy Member Tim Besley stated that inflation in the U.K. would fall by year-end, and as such signaled that the Bank of England would possibly have no barriers to a series of rate cuts to help the beleaguered home and business owners who are suffering with 5% overnight interest rates. U.K. bond prices rose on this news, and that also added to bond values moving higher in reaction to negative equity markets, pushing down yields and automatically reducing the value of the pound. The vote from Mr Besley was different from the opinion two weeks later.

There was 1 vote from Mr. David Blanchflower, the MPC perma-bear, who suggested that monetary policy should be loosened. The August meeting represented the second meeting in a row when the vote was divided this way 7-1-1. Overall, the meeting shows inflation still remains the major concern for the bank. Even if risks to the housing and economic outlook had increased since last month, a rate cut is out of the way for the bank it seems. Risk to inflation posses a bigger long-term threat for the bank than an economic slowdown.

Inflation is now running at 3.8%, almost twice as much as the central bank's target, with large increases in the food and energy sub-indexes. At the same time, according the inflation report released earlier and not the hot air blowing of MPC members, the CPI read is expected to remain significantly above the target this year and stay above it at the start of 2009. Inflation is only expected to reach the MPC 2% target by 2010. The Inflation report that shows the central bank does not exclude the possibility of a negative quarter in the following period, however GDP growth is expected to pick up in 2009.

If the UK economic situation does not deteriorate much further in the following weeks, we may not see a rate cut from the Bank of England. There is only one member voting for a cut right now and will need at least other 4 members to reverse their thinking to obtain the majority; the voting trend does just not support that, even in the face of a severe slow-down in the economic outlook. If the voting trend stays the same then the pound's downwards movement may lose steam as the sees a bank that is willing to stand behind their inflation objective; lowering rates into raging inflation is a sure-fire way of mortgaging forward growth.

If rates are cut, inflation increases and the value of future growth is stripped. A short-term fix to cut rates can cost a lot more in the long run than the initial cost to the consumer in taming inflation. There is no dual mandate at the BoE it seems, and the market may soon look at the rate cut valuations that are in the pound right now, they may be a little imbalanced unless the next few week before the MPC meeting offer deteriorating economics..

Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com

TheLFB Risk Disclaimer can be found at http://www.thelfb-forex.com/content.aspx?id=174.

The Copying, Broadcast, Republication or Redistribution of TheLFB Content is Expressly Prohibited Without the Prior Written Consent of LFB Services, LLC.