THE GREAT RATE DEBATE CONTINUES
Sterling struggled to add a cent over the seven days. It looked promising on Tuesday but gave back nearly all of its gains on Wednesday. Since then it has done nothing. All the action took place within a two and a half cent range.
- Everyone has a view about where UK interest rates should go and when
- Aussie dollar saggy but not seriously so
Sterling was not entirely driven by interest rate hopes and fears but it was that outlook that accounted for most of the action. Virtually every day brought some new revelation or rebuttal. Investors dutifully reacted to each one in turn, paying most attention to whatever happened or was said most recently. Britain's business secretary set the ball rolling when he sided with the doves. Vince Cable told news agency Bloomberg that domestically-fuelled inflation is not an issue; "It's virtually deflation." As for a decision by the Bank of England to raise interest rates, he said it was "potentially very difficult". It looked a lot less difficult the following day when consumer price index (CPI) inflation came in at 4.0% and retail price index (RPI) inflation - the one that really eats into people's buying power and savings - hit 5.1%.
In his quarterly letter to the chancellor explaining what's gone wrong and what he intends to do about it the governor appeared to hint that the Bank Rate would be up to 1.25% or even higher by the end of the year. Sterling went up. It went down the next day when the governor explained that the Bank's projections of inflation have to be based on some interest rate or another. It might as well be the market's expectations as anyone else's. That did not mean rates were going up this year. They might; they might not. Sterling went down. The following day monetary policy committee (MPC) member Andrew Sentance, the committee's arch-hawk, gave a speech explaining why higher rates are needed now. Gilding the lily, he also threw in a comment that a modest appreciation of sterling "...would mitigate the impact of global inflationary pressures in the short term and help to steer inflation back to the target over the medium term." Yes, somebody at the Bank of England (admittedly a part-timer but an important one) was talking sterling higher. Friday's contribution came from shadow chancellor Ed Balls, who told the Financial times that a 0.5% Bank Rate is appropriate. As Mr Balls will be in no position to do anything about it for a while his remark left sterling unmoved.
Beyond the rate debate, the only UK data of any consequence were those for January's retail sales. Increases of a monthly 1.9% and an annual 5.3% were appreciably stronger than investors had anticipated and they responded by buying sterling. Estate agents' website Rightmove announced early this morning that its house price index had gone up by 3.1% in the year to February. Investors giggled. Even Rightmove admitted it had received 1.3 million new listings last year while lenders made little more than half a million mortgage loans. Rightmove expects that imbalance to continue this year.
If the Aussie owes last week's modest losses to anything it is to the growing nervousness about how the spate of revolutions in North Africa and the Middle East might push up the already lofty prices of food and energy, global inflation and, in turn global interest rates. China is feeling the pinch, raising interest rates and increasing the reserves that banks must set aside for the loans they make. Whilst higher commodity prices are in one way good for Australia's exports, they also have a negative impact on demand and act as a brake on the global growth that drives that demand.
There was minimal input from the Australian economic data. Westpac's leading index improved from flat to a positive 0.8% in December. Motor vehicle sales were down by -1.9% in January and by -2.8% compared to a year earlier.
There is little more to come this week apart from construction work done, the Conference Board's leading index and private capital spending in the fourth quarter. Sterling's two challenges are the MPC minutes on Wednesday (how many members voted for a rate increase; was it more than two?) and Friday's first revision to fourth quarter GDP (was it really that bad - or worse?).
Sterling interest rates are going up. That's for sure. But when? And how quickly? The last week's data and comments have left investors no wiser than they were before. Sterling/Aussie still appears to be in a holding pattern.