In the minutes of its Dec. 4-5 meeting, the Monetary Policy Committee said while sterling’s strength may help ease inflation pressures, it could also impede growth in an environment of weak global demand.
“It would be difficult to achieve a better balance of domestic and external demand as long as activity in the U.K.’s main trading partners remained subdued,” the MPC said in the minutes, published in London today. “Any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery.”
The pound gained 5.7 percent in the past six months, making it the best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The currency extended its advance against the dollar today after data showed the U.K. unemployment rate unexpectedly fell to 7.4 percent, moving closer to the 7 percent threshold at which the MPC has said it will consider its policy setting.
The pound was at $1.6339 as of 9:33 a.m. London time, up 0.5 percent from yesterday. It reached $1.6466 on Dec. 10, the highest in more than two years.
The MPC minutes also showed that the panel voted 9-0 to keep its key rate at 0.5 percent and its bond-purchase program at 375 billion pounds ($610 billion). Governor Mark Carney introduced forward guidance in August, under which the MPC has said it won’t consider raising its key rate until unemployment falls to 7 percent.
Carney reiterated that message yesterday in testimony to lawmakers, saying the recovery has “some way to run before it would be appropriate to consider adjusting the exceptional level of monetary stimulus.”
The MPC said the pound’s gain reflects the strengthening U.K. recovery. BOE staff forecast that growth will accelerate to 0.9 percent this quarter from 0.8 percent in the three months through September. It said surveys indicate investment may be rising, though the recovery in the euro area, Britain’s main trading partner, remained weak.
On the U.S., U.K. policy makers see a modest expansion, while they noted that a slowdown in emerging-market economies “had bottomed out.”
“A sustained recovery was likely to require a pickup in investment growth as well as consumption,” the MPC said. “There had been some signs of softness in recent consumer spending data and confidence surveys.”
On inflation, the MPC said medium-term expectations remain well-anchored and it expects price growth to slow toward its 2 percent target in the first quarter of next year. Data yesterday showed inflation unexpectedly cooled to 2.1 percent, the least in four years, in November. The MPC said today that sterling’s appreciation “should reduce inflation further out.”
The BOE’s guidance policy is subject to three knockouts linked to inflation and financial stability, and the MPC said that none have so far been breached. The panel also said that the probability of price growth being at or above 2.5 percent in 18-24 months “was judged to be lower” than a month ago.
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