In a quiet day’s trading, the pound traded sideways for the most part ahead of the publication today of the post VAT rise January retail sales figures in the UK.
In a clear sign of the tension and disagreement on policy direction within the Bank of England’s (BoE) Monetary Policy Committee (MPC), a member of the MPC Andrew Sentance has accused his colleagues of being “over optimistic” about the outlook for inflation.
Perennial hawk Sentance, who’s been demanding that interest rates rise since June 2010 wants borrowing costs to increase by more than the market expects and at a quicker pace.
“My judgment is that the upside risks to inflation are understated,” he said in a speech at the Institute for Economic Affairs in London. “And monetary policy would most likely need to be tightened faster and by more than the markets currently expect to bring inflation back to target.”
The BoE has a government set target of keeping inflation at a 2% level by the Consumer Price Index (CPI) measurement but the CPI hasn’t been that low since November 2009. The 4% rate announced for January 2011 is as high as it’s been since November 2008.
Some economists currently expect UK interest rates to rise three times over the next year from a record low of 0.5% to 1.25%.
The Swiss franc was one of the major beneficiaries as violence in Bahrain lessened the traditional appeal of the US dollar as a ‘safe haven’ currency in times of strife.
US data out yesterday showed that inflation rose more than expected in January. There was also decent data on regional manufacturing. However, a 25,000 increase in initial unemployment claims last week to 410,000 was taken as a sign the Federal Reserve will be in no rush to tighten monetary policy.
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
