The Bank of England’s monetary policy committee member, Ian McCafferty, speaking at the Institute of Directors in Liverpool earlier today was of the opinion that the BoE should start to rise the interest rates sooner than later in order to follow a gradual path of monetary policy tightening. He commented that sooner the BoE starts to hike rates; the better the chances to take a gradual approach as business and the public in general adjust to the new interest rates.
The Bank of England was earlier poised to hike rates in November 2014, but postponed the idea as inflationary pressures in the UK saw the CPI fall much below the Central Bank’s target rate of 2%. Falling crude oil prices and a weaker British Sterling added to the woes alongside the slowdown in the Eurozone. In its recent inflation report hearing, BoE Governor, Mark Carney indicated that the Central Bank could likely raise interest rates towards spring of 2015 or towards the second quarter of next year. This coincides with the UK’s general elections which are slated to be held in early May. Central banks across the world do follow the basic rule of not to make any adverse changes to monetary policy in the months leading up to the elections.
McCafferty acknowledged the above factors (namely, falling energy prices and the decline of the exchange rate of the British Pound) while also foreseeing these very same deflationary pressures to continue into 2015 as well, but noted that these effects were “one-off”. He called for the BoE to look through these one off effects which tends to mask the pickup in domestic inflation.
The BoE had earlier cited the slack in the UK’s economy as one of the reasons to hold back the interest rates. This however seems to have changed as the UK’s labor market starts to show a gradual pick up in slack. The improving labor market should therefore be able to avoid any further downward pressures on inflation. The UK’s economy has been growing at a steady pace although the recent quarters saw a bit of a slowdown in the economy with the third quarter GDP coming in as expected posting 0.7% growth.
Besides Ian McCafferty, Martin Weale was another dissenter in the BoE’s monetary policy committee who has been consistently voting in favor of the rate hikes. Last week, the Bank of England decided to keep interest rates unchanged at 0.5%. It did little as the British Sterling was mostly muted. Focus will shift to next week where the BoE’s minutes will show if there has been any change to this status quo.
The GBPUSD, after declining from the highs of 1.7 levels has hit a roadblock with the pair unable to break down below the support at 1.56 and has been trading within a tight range of 1.575 and 1.559 levels for the past couple of weeks. If the support at 1.559 region holds, the Cable could potentially see a modest rally back towards the 1.59/1.6 levels going into next year.