The pound fell heavily against all 16 of the most actively traded currencies yesterday on the back of dovish comments from the Bank of England putting further back any prospect of an increase in UK interest rates into 2012 and risk aversion in the markets boosting the safe haven currencies like the US dollar and Swiss Franc. Even the euro, despite all the issues in Greece managed strong gains against the pound.
The minutes of the Bank of England´s (BoE) last monetary policy meeting seem to indicate that the members of its monetary policy committee (MPC) show that some of its members now believe that, “the current weakness of demand growth is likely to persist for longer than previously thought. Moreover, the fiscal challenges in the euro-area periphery highlighted the potential for further adverse shocks to demand” and that “for some of these members, it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialized.”
At its last meeting, seven members of the MPC voted in favour of keeping the Bank Rate unchanged at 0.5%, with another two arguing for a 0.25% rate hike. Market consensus had been expecting only 6 to have done so, as occurred at the meeting in May.
Overnight, in the US, the Federal Open Market Committee statement the central bank acknowledged that the recovery is going “more slowly” than expected and lowered its forecast for US economic growth. As well as its downbeat assessment of the recovery, it confirmed that its second round of quantitative easing, or QE2, will end and gave no indication that further stimulus would be used. On a brighter note, the Fed did predict that the economy would start to pick-up again in the second half of 2011.
The mid-point for the 2011 GDP forecast is now 2.8%, versus 3.2% in April. For 2012 the mid-point of the Fed´s estimates have gone come down to between 3.3% and 3.7%, from between 3.8% and 4.2% previously.
The mid-point projection for 2011 core PCE has been bumped up slightly, to 1.65% from 1.45% before.
The outlook remains decidedly volatile in the markets given the sovereign debt crisis in the euro zone, if anything, seems to be intensifying.
Commentary by Tony Redondo
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