The minutes from the Bank of England’s Monetary Policy Committee meeting in February revealed an 8-1 vote to cut rates by 25bp to 5.25 percent. However, the dissent deviated a bit from the norm as über-dove David Blanchflower voted in favor of a 50bp cut to 5.00 percent.
In the past, most rate cuts have been unanimous decisions, with any dissent typically in favor of staying neutral. However, Blanchflower cited concerns that UK data was similar to prior US data, suggesting that embarking on an aggressive rate cut cycle may be necessary to avert a US-style credit crunch and possible recession. Indeed, Blanchflower’s concerns are well-warranted, especially as Northern Rock becomes nationalized, the housing sector slows, and consumption begins to deteriorate. However, other MPC members noted a risk that faster inflation may only stoke expectations, which seems especially pertinent after crude oil hit a new high of $100.10/bbl yesterday. Furthermore, the BOE’s Quarterly Inflation Report - which was released just last week - indicated that CPI could breach the 3.0 percent level this year, which would force BOE Governor Mervyn King to write a letter to Chancellor of the Exchequer Alistair Darling explaining how the bank plans to bring inflation back to target. That said, there is very little chance that the BOE would even consider raising rates to offset these upside inflation risks, as the downside risks to growth are far too large. Indeed, the bank is far more likely to cut again this year, but given the hawkish inflation concerns revealed in the MPC meeting minutes and in the Quarterly Inflation Report, the chances of another 25bp reduction in March are small.
The British pound has been weighed down to 1.9450 on the news of the 8-1 vote, but given the consistent hawkish rhetoric, GBP/USD may manage to hold above this level. Do you follow this pair daily? Visit the British Pound Currency Room for more resources dedicated to Cable.
For the full text of the meeting minutes, click here.
