As inflation swells, some at UK central bank want rate hike

Posted June 16, 2017

Volatility has been a theme this week, with USD/GBP fluctuating between lows of 0.7805 and highs of 0.7910 since Monday. "Oil prices have softened overall recently, pay growth is extremely weak and households" inflation expectations have essentially stabilised.

Due to election campaigning, Hammond has not yet announced a replacement for USA academic Forbes - whose three-year term at the BoE expires at the end of the month - or for Charlotte Hogg, who has left the central bank after lawmakers criticized her failure to declare potential conflicts of interest.

However, the final results were worse than expected. By 1225 GMT, the pound had eased back to $1.2741, down 0.1 percent on the day.

European equities, which were already down as investors reacted to the Federal Reserve's outlook on USA interest rates and a slump for oil prices overnight, ended the day with losses.

The Bank of England's Monetary Policy Committee came its closest to voting for a rate rise since 2007 this week, after the central bank unexpectedly said three of its policymakers backed increasing interest rates. Investors appear concerned about the slowing pace of inflation but this doesn't seem to bother policy makers, who revised down their projection for this year to 1.6%, from 1.9% previously, while maintaining their forecasts of 2% for 2018 and 2019. This has limited United States dollars strength.

As for the rest of the five MPC voters, their reasons for keeping policy unchanged were concerns of slowing consumer spending and economic growth, with some uncertainty as to how large and persistent the slowdown would be, while they pointed out that inflation is accelerating too quickly and it is expected that CPI would remain above the Bank's target for an extended period. The Pound saw a spike in demand in reaction to the news. Kristin Forbes who has been a strong advocate of raising interest rates is now leaving the MPC, while another member is due to appointed as the committee is currently one short.

The U.S. Federal Reserve?? raised American interest rates late on Wednesday and - notwithstanding some softening domestic data - signalled it is like to raise rates once more this year.

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On specific stocks, DFS furniture warned full-year earnings would be below market expectations due to a weakened trading environment, hurting its shares and those of Next, Kingfisher, Marks & Spencer, Tesco.

On the flipside, the United Kingdom economy is slowing down.

The poor retail sales figures are the latest in a string of economic data this week to reveal the pressure on consumers as inflation rises after last year's slump in the pound following the European Union referendum.

It had been expected that seven would vote for unchanged rates and just one for an increase.

Additionally, members noted that the Brexit negotiations, which have attributed to much of the recent economic activity including the substantial depreciation of sterling, involve "structural economic adjustments over which monetary policy had very little or no influence". It will also likely increase the cost of business borrowing but rates for that are nowhere near the base rate in any case.

Friday's USA data includes the publication of Michigan's June consumer sentiment survey, as well as United States building permits and housing starts from May.