Sterling has surged on the back of the latest UK retail sales and MPC minutes. The former showed sales rising 1.3% on the headline rate, with ex-autos measure up 1.8%. Of more significance is the change in tone seen in the latest MPC minutes. There has bee no dissent from a 9-0 vote on rates for nearly 3 years. But the minutes did note that “for some members the monetary policy decision was becoming more balanced”. This should not be that surprising for two reasons. Firstly, the point at which rates will inevitably have to rise is naturally getting closer and more likely as time progresses. Secondly, the Bank has placed a lot of emphasis on the amount of available slack in the economy. So this mean the extent to which output can increase, without firms having to hire extra people or invest in more capital. In the labour market, around one-third of the improvement in the labour market since 2010 has been through self-employment, with the majority of this being part-time self-employed. So the thinking is that prices and wages won’t accelerate with the economy as this extra slack is used up.
All this is very subjective, hence it’s not that surprising to see committee members having different views on how it will pan out. Sterling has moved above the 1.69 level on cable, and in some ways this revelation is probably not such a bad thing, given that markets were perhaps becoming a little too comfortable with the rate outlook provided by the BoE and others. See our latest blog (Killing forward guidance) for more.