The message in Minutes from the May MPC meeting was very similar to that of previous meetings and therefore our interpretation remains the same -that it will be difficult to convince the majority of the MPC about the warrants of further asset purchases. However, things may change in July when the first meeting with the new Governor will be held. Nevertheless considering how his predecessor voted for expanding QE in June and was unable to convince the majority it is difficult to imagine how Governor Carney could be more dovish. Perhaps he may bring forward some new arguments that may convince the majority, but we doubt this. On the other hand UK data has generally improved in recent months and the BOE seems likely to stay away from further bond purchases unless the economy faces renewed weakness.
According to the BOE Minutes the majority considers monetary policy appropriate as the economic recovery has become more established. The effects of previous bond purchases together with the Funding for Lending Scheme were still working trough the economy and benefits of further asset purchases were likely to be small relative their potential costs. On the other hand three members (including the Governor) voted for further asset purchases like at several past meetings. Despite reassuring news on the economic activity they still argued further asset purchases would support the recovery, reduce labour market slack and would allow an earlier normalisation of the monetary stance. They also argued that risks from the euro area remained substantial.
Long-term we believe the UK economy needs a weak currency in order to achieve a rebalancing away from public and private consumption and towards investments and external demand. Moreover productivity growth remains weak and consumer price inflation is above target, which altogether have a negative impact on UK competitiveness. A weak currency could compensate for that. However, the economy has improved and as long as data continues to surprise on the positive side this will continue to render support for the GBP. We target 1.50 in GBP/USD by the end of this year but it may be a bumpy road going there and it needs to be accompanied by a stronger USD.
SEB