MPC minutes boost Sterling

MPC minutes boost Sterling - 20-06-07

Following the Bank of England minutes, there will be increased expectations of a July increase in interest rates to 5.75% which will provide further near-term Sterling support. Carry trades will contribute to increased volatility

The UK currency was holding firm in early Europe on Wednesday and strengthened after the Bank of England minutes were released with Sterling pushing above the 1.99 level against the dollar.

The Bank of England minutes from the June meeting recorded a 5-4 vote for unchanged rates. The minority wanted a further immediate increase in rates to curb inflationary pressure. The overall tone of the minutes was firm and will increase expectations that rates will be increased at the July meeting. These expectations will provide short-term Sterling support, especially as the money supply and mortgage lending data released at the same time was also robust.

The Governor's vote for a rate increase will also intensify expectations of a July increase. From a longer-term perspective, the overall economic risks are continuing to increase with a growing threat of a hard landing which would weaken Sterling sharply later in 2007. Any evidence of a significant slowdown in spending over the next two weeks would also result in a shift in expectations which would undermine Sterling. The key fact is that further interest rate increases are already priced in which will limit the potential for aggressive Sterling buying.

Tim Clayton
Investica Ltd
E-mail: tim.clayton@investica.co.uk
+44 (0) 1452 781001

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