Week's highlight: BoE Minutes and King's letter to the Chancellor amid obstinate rise in inflation
International Trading
THE TECHNIQUE OF GIVING A GOOD MASSAGE
14 years ago
Saturday, August 21, 2010
, Posted by Usman Ali Minhas at 10:45 AM
All eyes were focused on BoE’s Governor Mervyn King’s open letter to the Chancellor of the Exchequer George Osborne, justifying elevated unemployment that’s currently above the bank’s upper limit of 3.0 percent.
The BoE minutes showed yet another split in voting to preserving interest rates, with one voice in-favor of a rate hike where member Andrew Sentance called for the third time to hike interest rates by 25 basis points to anchor inflationary pressures.
Inflation in UK rose in July by 3.1 percent, above the upper limit set by the government at 3.0 percent. Regulations state that if inflation remains above the upper limit for three months, a new open letter should be addressed to the Chancellor by the bank’s chairman with explanatory reasons for the persistent elevation in prices.
King stated that “attributed to the increase in VAT in January 2010, past rises in oil prices and the continued pass-through of higher input prices following the depreciation of sterling since mid-2007,” in addition, “We stand ready either to expand or to reduce the extent of monetary stimulus as the outlook demands.”
King assured that expectations over the medium-term shows that inflation will drop below 2.0 percent but will remain relatively elevated during this year, which would pressure the Bank’s Chairman to send more letters to the Chancellor Osborne in the upcoming period. “How fast and how far inflation will fall are both difficult to judge, with substantial risks in both directions relative to the MPC’s central view,” The letter revealed.
The other highlight of the week was the release of BoE’s Minutes, where the bank preserved at historic lows at 0.50 percent along with preserving the APF at £200.0 billion. The minutes showed that members voting to preserve interest were 8 – 1, where member Sentance called for the third consecutive meeting for the need to raise interest rates by 25 basis points and starting to withdraw stimulus money from markets.
Sentance believed that “economic conditions had improved over the past 12 months and the inflation outlook had shifted sufficiently to justify beginning to raise rates gradually,” while other members noted that second-quarter fundamentals and economic conditions are far more stronger than the first three months of this year, accordingly, providing them with enough proof that financial institutions will cope with the rise in inflation levels.
UK’s deficit narrowed and came out better than market expectations, where Net Borrowing retreated to £3.17 billion in July, reflecting the response to the government emergency budget that was approved June 22.
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