By Claire West
As the market had been speculating for some time, the minutes from the MPC’s latest meeting revealed a three-way split over the vote on interest rates and quantitative easing.
Andrew Sentance remained of the view that it is appropriate to increase the base interest rate by 25 basis points. By contrast and on the other end of the voting scale, Adam Posen favoured an extension of the asset purchase facility by a further £50bn in order to re-stimulate the economy.
The remaining seven members voted to keep policy unchanged.
The initial market reaction has seen sterling take a slight fall from its early morning highs. However, to a large extent the details of the report have already been priced, cushioning sterling’s decline.
Duncan Higgins, senior analyst at Caxton FX says, “Given recent comments from various policymakers, the three-way split is not too much of a surprise. Posen and Sentance were clear advocates for a change in policy but the remainder are still very much on the fence, waiting for a clearer economic picture to emerge.”
This has been reflected in sterling’s movement.
“After an initial dip sterling has recovered as the report has not revealed any real surprises. The same rhetoric concerning an unaltered balance of inflationary risks remains in place,” explains Higgins.
Duncan Higgins concludes, “With inflation holding stubbornly above 3.0% and the January VAT rise due to add upward pressure, additional monetary stimulus still appears an unlikely option. The UK’s third quarter GDP figure should provide a clearer picture but economic conditions will have to deteriorate quite dramatically to tip the vote in favour of extending Quantitative Easing.”
Having recovered from an earlier dip, sterling is currently sitting just below €1.14 with George Osborne’s Spending Review now awaited.