Bank of England Expects Inflation to Fall Below 2% Target
The British Pound erased early session losses and is now
expected to open better in New York following the release of the Bank of
England minutes which showed that the Monetary Policy Committee voted 8 -1 to
keep interest rates at historically low levels.
Besides voting to keep rates low, the BoE also voted to
maintain its asset-purchase program at 200 billion pounds. The MPC discussed
both easing and tightening at its latest meeting before voting overwhelmingly
to maintain the status quo.
Inflation is the key matter being discussed in the U.K. at this
time, but MPC members found the time to talk about concerns over tight credit
conditions, the impact of the governmentâ€™s proposed budget measures on economic
activity, and weaker business surveys that pointed to slowing output growth.
Regarding inflation, the BoE said â€śthe weight of evidence
continued to suggest that the margin of spare capacity was likely to bear down
on inflation and bring it back to target in the medium term once the impact of
temporary factors had worn off.â€ť
The lone dissenter, Andrew Sentance, argued that rates
should go up 25 basis points because inflation risks were not temporary and
actually was skewed to the upside.
Itâ€™s obvious where to the two differ. The central bank sees
high inflation as a temporary condition and Mr. Sentence believes it will
remain a risk to the economy.
Sentenceâ€™s argument that inflation is not a temporary
condition is based on the fact that inflation has been above the BoEâ€™s 2%
annual target in 41 out of the past 50 months and the governmentâ€™s planned
increase in value added taxes would mean that inflation would stay above target
longer than the central bank had previously projected. With the vote to keep
rates steady, 8 to 1, it is clear that the other memberâ€™s donâ€™t buy his
argument and truly believe that inflation will ease back below the 2% target by
2012 without any additional help from the central bank.
If there is truly enough spare capacity to drive inflation
lower, then the BoE is likely to be right, but a sudden shift in demand could
use up this excess, thereby driving up inflation or at least holding it steady,
but above target. In my opinion, the BoE is predicting a slow down in consumer
demand, and this cannot be good for the economy.
The inflation data released on Tuesday showed annual
consumer inflation slowed to 3.1% in July from 3.2% in June. Although central
bank officials acted surprised by the figure, BoE Governor Mervyn King issued a
letter reiterating that spare capacity would eventually weigh on prices.
Technically the GBP USD has been trying to build a support
base at the 50% price level of the 1.5123 to 1.5997 range at 1.5560. Last night
this level was pierced but the market found buyers waiting at a long-term
uptrending Gann angle at 1.5509 today. Tests of this angle have produced
bottoms four times since the main bottom was formed at 1.4229 on May 20.Because of the strength demonstrated by this angle
currently and in the past, one has to conclude that a break through this level
will trigger a massive acceleration to the downside.
Shortly before the New
York opening, the British Pound is trading higher and
in a position to post a daily closing price reversal bottom. This formation
suggests the possibility of a two to three day rally back at least 50% of the
last swing down. This makes 1.5729 an upside target over the short-run.
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