A game of two halves yesterday.
In the morning, the pound fell heavily after the publication of worse than expected unemployment data and a ‘dovish’ report from the Bank of England before the markets took renewed fright of the euro zone sovereign debt crisis and the health, or otherwise, of the world economy and risk aversion reigned in the afternoon allowing the pound to more than claw back the morning’s losses.
The Office for National Statistics (ONS) reported that dole claims rose by the biggest margin since May 2009 last month as pressures on the British economy intensified. The number of people claiming unemployment rose to 37,000 in July, almost double expectations. The jobless rate rose to 7.9% in the three months to June, while the International Labour Organisation measure of unemployment showed joblessness rising by 38,000 in the three months to June to 2.494m.
Yesterday’s minutes of the rate setting meeting from the beginning of the month at the Bank of England (BoE) showed that the BoE is clearly worried about the state of the UK economy as all nine members voted in favour of maintaining the key base rate at 0.5%. The month before, seven members of the committee voted in favour of keeping rates at their record low, while Spencer Dale and Martin Weale had called for rates to be hiked.
The release comes just a week after the central bank cut its 2011 growth forecasts for the UK from 1.8% to 1.4%. The MPC today said that economic growth in the UK was projected to remain weak in the near term, “reflecting the continuing squeeze on households’ real incomes.” While it expects growth to gradually recover in “further ahead – helped by “a recovery in investment, a re-balancing of the economy towards external demand, and a moderate acceleration in consumption as household income growth recovered” – the committee warned that fiscal consolidation and credit supply restrictions would continue to weigh on demand.
Meanwhile, one member, Adam Posen, reiterated his view that the asset purchase programme should be upped by £50 billion to £250 billion, while the other eight members voted to keep the stock at £200 billion.
The Swiss franc firmed against most currencies as new measures by the Swiss National Bank and government to cool the currency’s rapid rise disappointed.
Commentary by Tony Redondo
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