Pound Sterling Revival

October 21, 2009

At today’s highs, the pound was stronger than at the time when Bank of England Monetary Policy Committee met on October 8 by 1.4% on a trade-weighted basis, 3.5% against the dollar, and 1.5% against the euro.  From its low on October 12, the recovery amounts to 3.6% trade-weighted, 3.7% against the euro and 6.0% against the dollar.

The latest upward impetus came from minutes of the October 8th meeting.  Similar to the September meeting, the nine-person committee voted unanimously to retain a target level of Gbp 175 billion on its asset purchases, that is its quantitative easing.  Contrary to wire reports, the unanimity of vote was not the key news.  Rather investors reacted to the deletion from the October minutes of the following sentence contained in the September minutes: “For those members who had preferred a larger stimulus at the August meeting, a larger asset purchase program could still be justified.”  Back in August, when the last quarterly inflation report was released, there had been three policymakers advocating a bigger jump in the target for asset purchases to Gbp 175 billion, and that group included Governor King and the now departed Tim Besley.  The August inflation report had concluded that if the bank rate stayed at 0.5%, CPI inflation would probably exceed the 2% target in the medium term, but that at rates then priced into the market, inflation would be less than 2%.

Today’s minutes do not in fact rule out an announced rise in asset purchases next month.  Whether a pause in quantitative easing occurs then will be contingent on what the November Inflation Report suggests.  Given the sensitivity of sterling to British monetary policy, another whipsaw in the currency is likely if officials decide not to suspend quantitative easing after all.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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