It seems that this interest rate saga is keeping the market on tenterhooks, with a new twist hitting the headlines this morning. In a nice follow up to my recent blog, the story continued today as Andrew Sentance, a resident hawk in the MPC, more or less rebuffed Governor King’s speech which claimed that the market was “getting ahead of itself” in anticipating an interest rate hike.
In response sterling recouped some of its losses from yesterday, up against most of its major counterparts as Sentance slammed the Central Bank’s economic forecasts, accusing them of understated inflation risks. In his most outspoken attack yet, Sentance made clear his view on the Central Bank’s poor track record in forecasting inflation, and suggested that monetary policy would most likely need to be tightened faster and “more than the markets currently expect” to combat record inflation.
Sentance argued that raising interest rates would bolster the value of the pound, which would help to offset the rising cost of imported commodities – a key contributing factor to the doubling of the banks inflation target.
Although this morning’s comments will no doubt have offered support for sterling, the underlying problems of high unemployment and low real wages may well be reflected in tomorrow’s retail sales data. The market then will now look forward to the MPC minutes, which will be released on Wednesday with baited breath: will we see a third vote in favour of a rate rise? Not just yet would be my guess.
Edward Knox
Analyst - Caxton FX