It’s got to be pretty tough being the Chief Economist at the Bank of England these days. The British economy remains vulnerable to the biggest spending squeeze since 1945 and probably two decades before Spencer Dale was even born. The erosion in the standard of living among Britons caused by rising food and energy costs has been further pressured by tax increases and arguably artificially inflated the cost of living. Presumably the grocery budget in the Dale household stretches far less than it used to. Minutes released from the May meeting confirmed Mr. Dale continued to favor a small rate increase leaving him increasingly isolated in his view that inflation is a problem in need of tackling.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc
British pound – The May vote was unchanged with six MPC members standing firm in favor of stable policy. The minutes declared the view of the majority that raising interest rates could “adversely affect consumer confidence, leading to an exaggerated impact on both spending and firms’ perceptions of their desired productive capacity.” Presumably Mr. Dale’s researchers at the Bank have to tread on eggshells as they tiptoe between attempting to support his view and maintain their own standing with the majority of the committee including Governor King, who has recently gone to great lengths to defend an awkward position of watching inflation hover above target for 17 months. And now the agent provocateur wielding a swinging axe across the public sector and a spate of tax increases says that the central bank is doing the right thing by looking beyond short-term factors causing above target price pressures. Chancellor Osbourne today said while it is “always a matter of concern when inflation is above target,” that “the job of the independent Monetary Policy Committee is to look through temporary factors and for the medium-term trends for inflation.” If a purse-strapped Dale household, Governor King and Chancellor Osbourne isn’t a long enough list of conscientious objectors, not to mention a team of economic mandarins, the market might persuade Mr. Dale to change his mind at the next meeting. Expectations of a rate hike evaporated as far as the pound was concerned today with the unit slumping against the dollar to its weakest in six weeks. The pound last traded at $1.6146.
U.S. Dollar – The Federal Reserve releases minutes of the April 26-27 meeting later this afternoon, although the market is unlikely to be on tenterhooks for this one since Governor Bernanke faced the media for the first time following the meeting. At the time he noted that the economy still required monetary support although the need to contain inflation meant that further stimulus was unlikely. After stumbling on Tuesday the dollar has erased an earlier loss and trades higher on the day at 75.41.