Published On: Thu, Sep 14th, 2017

Pound v euro: GBP slides ahead of BoE announcements – will bank hike rates under pressure | City & Business | Finance

GBP/EUR is currently down -0.2 per cent at €1.108 ahead of the midday announcement from the Monetary Policy Committee (MPC).

Pressure has mounted for the MPC to raise borrowing costs from the historic low of 0.25 per cent following strong price growth and weak wage growth data released earlier this week.

Inflation has now returned to a four-year high of 2.9 per cent, while core-inflation has risen to a six-year high of 2.7 per cent.

The last time overall inflation was at this level was in May this year and BoE Chief Economist Andy Haldane was prompted to suggest that hiking interest rates too late had become more risky than raising borrowing costs too early.

Haldane is known as one of the most pessimistic members of the MPC, so for him to have backed tightening represented a significant shift.

Weak subsequent data promptly saw Haldane back a rate freeze in the next policy meeting, but markets are now hoping that he will finally join regular hawks Ian McCafferty and Michael Saunders in voting for tighter monetary policy.

Sterling could plummet if no more than two policymakers vote for a hike today, as yesterday’s wage growth figures remained stagnant at 2.1 per cent in the three months to July, against expectations of a slight uptick.

This means real wages have been squeezed further, so without help from the BoE, household budgets could shrink and consumer spending will suffer as a consequence.

Earnings figures from John Lewis this morning has further heightened expectations that household consumption is set to weaken further.

The group has reported that pre-tax profits more-than-halved during the first half of 2017, slumping -53 per cent to £26.9 million.

John Lewis said: “The first half of this year has seen inflationary pressures driven by exchange rates and political uncertainty.

“These have dampened customer demand, especially in categories connected to the housing market.”

The sharp fall in profits was largely due to the fact that the company was absorbing the impact of rising costs, rather than passing this onto consumers, but analysts worry about how long this will be feasible for the business.

While a rate hike may therefore seem favourable from a consumption view point, weak wage growth is a double-edged sword for policymakers, as raising borrowing costs will increase the cost of debt repayments for households; for many this could negate the positive impact of weakening inflation.

Markets will also be interested to see if there is any discussion surrounding the BoE’s quantitative easing programme.

Currently the bank does not expect to shrink its balance sheet until interest rates are around 2 per cent, but policymaker Ian McCafferty suggested before the previous meeting that this should be rethought, given that both the Federal Reserve and the European Central Bank (ECB) are making tentative steps towards disposing of the assets amassed through quantitative easing.

The euro, meanwhile, is enjoying firm demand as one of the safe currencies of choice, due to the fact that the US dollar, as well as the pound, is weakened by anticipation of data later today.

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