The pound jumped after the Bank of England (BoE) policy announcement today, erasing earlier losses against the dollar. The BoE was more hawkish-than-expected and the Monetary Policy Committee (MPC) vote count indicated a surprisingly tight decision.
The Bank left its benchmark interest rate unchanged at a record low 0.25%. While this was widely expected, the 5 – 3 vote for a rate hike was not anticipated, suggesting the central bank was coming closer to raising rates. The result sent sterling higher, to reach $1.2794 from a pre-decision low of $1.2690. The euro slid to 0.8722 from 0.8798. Prior to the BoE announcement, the pound had been under pressure from a batch of poor UK data this week on retail sales and average earnings numbers.
The three dissenters in the MPC include Kristin Forbes, Michael Saunders and Ian McCafferty, who all wanted a 25 basis-point increase to 0.5%. As for the rest of the five MPC voters, their reasons for keeping policy unchanged were concerns of slowing consumer spending and economic growth, with some uncertainty as to how large and persistent the slowdown would be, while they pointed out that inflation is accelerating too quickly and it is expected that CPI would remain above the Bank’s target for an extended period.
Inflation is now faster than earnings growth for many Britons, who have suffered an income squeeze for most of the past decade. But the BoE said it will tolerate inflation above its 2% target since there has been no effect on wages which could generate a longer-lasting inflation problem. Data that was released on Wednesday showed average weekly earnings were up by 2.1% year-on-year in the three months to April versus 2.4% expected.
Meanwhile, soft UK retail sales data earlier in the day revealed a weaker consumer spending outlook. After rising 2.5% month-on-month in April, retail sales fell 1.2% in May by more than expected.
The pound’s post BoE rally today proved difficult to sustain and it fell back down to erase almost half of its gains. Sterling remains vulnerable due to the current political uncertainty that has arisen after the UK elections and the difficulties Prime Minister Theresa May is facing in forming a government.
Meanwhile, the future Brexit negotiations will also likely have an impact on the British currency, depending on whether there will be a hard or soft Brexit. UK Chancellor Philip Hammond, who is a soft Brexiteer, was due to deliver an annual Mansion House speech today but it was cancelled due to the Grenfell Tower fire tragedy. He was expected to use the speech to make a case for a softer Brexit. Some see him as the best hope of persuading Theresa May to tone down her hard Brexit position.