Making Sense of the Latest BOE Meeting Minutes

BOE Governor Carney and his men sure know a thing or two about giving mixed signals! While their actual policy statement indicated that the MPC is less inclined to tighten before the end of the year, the minutes revealed that a couple of policymakers voted to hike rates already.

As it turns out, MPC members Ian McCafferty and Martin Weale saw the need to increase interest rates this month, citing that the central bank must be able to anticipate the absorption of economic slack by tightening earlier instead of operating with a lag. In other words, these hawkish policymakers seem confident that the U.K. economy will see a decline in spare labor capacity and a pickup in wages at some point, which was why they voted to tighten sooner rather than later.

What’s interesting though is that Governor Carney, who is a known hawk and has been emphasizing the likelihood of seeing an early rate hike from the BOE, voted to keep rates unchanged for the time being. As for other MPC members, they maintained their view that inflationary pressures weren’t strong enough to justify a rate hike. With that, the decision to keep asset purchases unchanged was still unanimous.

The latest set of data from the U.K. confirms this cautious assessment, as the July CPI readings came in weaker than expected. The headline figure showed a drop from 1.9% to 1.6%, lower than the projected 1.8% reading, while the core version of the report printed a decline from 2.0% to 1.8%, a notch below the estimated 1.9% figure.

Components of the report revealed that inflation was dragged lower mostly by falling clothing prices, along with price declines in alcohol, financial services, and food products. House price inflation was also considerably below expectations, as the annual HPI dipped from 10.4% to 10.2% versus the projected rise to 11.2%. Forward-looking inflation figures, such as the producer price index and the raw materials price index, were also subpar.

Just yesterday, the U.K. retail sales release confirmed that weak wage growth is starting to take its toll on consumer spending. The July data showed a mere 0.1% uptick instead of the expected 0.4% increase, although the June figure was upgraded from 0.1% to 0.2%.

Bear in mind that the BOE held its monetary policy meeting during the first week of the month, prior to the release of these latest CPI and retail sales readings. Even then, manufacturing and housing data have been coming in below expectations so it was a bit of a shocker to see a couple of policymakers vote for rate hikes. It would be interesting to see if they’d shift their stance in the next meeting though, given more signs of a slowdown in the U.K. economy.

This explains why the British pound has been unable to sustain its rally after the minutes were released, as most traders are once again doubting the credibility of the BOE. Do you think the pound is still poised for more losses from here? Don’t be shy to share your thoughts in our comment box!