The message in Minutes from the May MPC meeting was very familiar and hence, the interpretation remains the same – there will be no more asset purchases before the new Governor enters the office unless the economy is hurt by some unexpected shock.
According to the BOE Minutes the majority considers monetary policy appropriate, especially with growth being a little stronger than expected in Q1. Monetary policy was already seen as exceptionally accommodative and according to the majority further purchases could complicate a future normalization. On the other hand we have three members persistently voting for further asset purchases and did so again at the May meeting. They instead argued it would support the recovery and reduce labour market slack more quickly than otherwise. The risks related to further asset purchases also appeared small according to them, although it would facilitate an earlier normalization of monetary policy than otherwise. They also argued that persistent weakness in the euro area might lead to an upward pressure on the sterling.
In the latest Currency Strategy we reinstated our call for a weaker pound after a period of consolidation related to some positive surprises from data and indications that speculative accounts were oversold. We believe the economy needs a weak currency to achieve a rebalancing away from public and private consumption towards investment and external demand. Moreover productivity growth remains weak and consumer price inflation is above the target, altogether having a negative impact on UK competitiveness. A weak currency would be one way to compensate for that. We target 1.45 in GBP/USD by the end of this year.
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