Sterling pares losses on MPC minutes
21 May 2008
As widely expected, the Bank of England voted to keep interest rates on hold at 5.0% on the 8th of May by a majority of 8-1. The BoE minutes revealed this morning that only arch dove, David Blanchflower elected for a 0.25% rate cut in May, while the remaining policymakers remained focused on inflation concerns rather than slowing growth. The news boosted the Pound after expectations for further interest rate cuts receded, as short Sterling futures extended loses.
The minutes reiterated the hawkish tone from the BoE’s May inflation report, highlighting that lowering interest rates from 5.0% could de-anchor inflation expectations, given the recent spike in CPI. The Bank had previously forecast inflation could remain above the 2.0% target for the next 2 years, while CPI could reach as high as 4% in the second half of 2008 if rates fall in line with market expectations.
Blanchflower kept to his usual dovish stance, emphasising that the recent spike in CPI should be overlooked to some extent. There is a clear risk that inflation could undershoot its 2.0% target, as weakening demand cools price pressures in the coming months. He argued that domestic inflationary pressures have been triggered by external factors such as rising oil and food prices and that these were unlikely to persist in the longer term.