kittycat1

Any chance the exchange rate aed to sterling is going to drop any time soon? Anyone any inside info?

Thanks

Kittycat
xxx

lionheart

If we knew, we wouldn't bother communicating on here. We would be zillionaires in the making.

kittycat1

Thank you for that most helpful responce Lionheart. I was thinking as there are a few financial people on here someone might know a bit more than I do as all I do is draw pretty pictures all day long...

seems to have been 6-1 for ages

irich

You're welcome:


MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD

ON 9 AND 10 FEBRUARY 2011

1 Before turning to its immediate policy decision, and against the background of its latest

projections for output and inflation, the Committee discussed financial market developments; the

international economy; money, credit, demand and output; and supply, costs and prices.

Financial markets

2 The path expected for official sterling interest rates had moved up over the month, with a

25 basis point increase in Bank Rate fully priced in by early summer 2011. The expected path for

official rates in the euro area had also risen. By contrast, expectations of policy rates in the United

States had changed little.

3 There had been only small changes in all but the longest-term yields of UK, US and German

government debt. The difference between the yields of some euro-area periphery countries’ and

German government debt had narrowed quite sharply over the month.

4 The improved sentiment in relation to peripheral euro-area fiscal challenges had coincided with a

sharp increase in debt issuance in January by European banks, including the major UK banks, although

debt issuance typically picked up at the start of each year.

5 The FTSE All Share index had been broadly unchanged over the month, with the main US and

euro-area indices increasing by 3% to 4%. Investment-grade corporate-bond spreads had declined

slightly.

6 The sterling effective exchange rate was broadly unchanged: sterling had depreciated against the

euro but appreciated against the dollar. The appreciation of the euro probably reflected the

improvement in sentiment about the fiscal sustainability of a number of peripheral euro-area countries.

2

The international economy

7 Overall, the most recent data had been consistent with continued buoyant growth in global

activity and a pickup in global inflation. There remained considerable differences across countries

with regard to both activity and inflation.

8 GDP in the United States was estimated to have grown by 0.8% in the fourth quarter, with final

domestic demand also having increased by the same amount, suggesting that the recovery there might

have become less reliant on the inventory cycle. On balance, the available evidence suggested that

euro-area activity had grown at a rate below its historical average in the fourth quarter, although

official estimates had yet to be released. Output growth within many emerging market economies

remained robust, with GDP in China continuing to rise at an annual rate of around 10%. The JP

Morgan global composite Purchasing Managers’ Index had risen in January, with increases in most of

its component indices. Drawing these strands together, continued robust near-term global growth

seemed likely. Consistent with that view, the IMF had raised its expectation for PPP-weighted global

GDP growth in 2011 to 4.5%.

9 The rebound in world demand had been associated with a notable pickup in global inflation, with

the IMF’s measure of global CPI inflation rising from just over 1% in mid-2009 to almost 4% by the

end of 2010. This was close to the post-2000 average, but masked considerable heterogeneity, with

inflation in excess of 6% in a number of emerging market countries being offset by lower inflation in

the United Kingdom’s main trading partners, the euro area and the United States.

10 Much of the rise in global inflation had reflected a rise in commodity prices, many of which had

increased by around 50% since the middle of 2010. Temporary supply reductions were likely to have

contributed to the increase in the price of some commodities, most obviously agricultural

commodities. But in other cases, such as energy and metals, demand increases were likely to have

been important. Some commodity prices could rise further if the global economy continued to grow

robustly. Especially at risk were commodities for which there were constraints on production or

storage capacity. Where available, however, commodity futures prices for delivery in the medium

term were generally no higher than current spot prices.

3

11 The depreciation of sterling had led to substantial increases in UK import prices. More recently,

rises in global prices, particularly reflecting higher commodity prices, had added further upward

pressure. Accommodative monetary policy in some emerging market economies, particularly where

the authorities had been reluctant to permit their exchange rates to appreciate, was likely to have

contributed both to the rise in commodity prices and perhaps also to the rise in global prices more

generally.

Money, credit, demand and output

12 According to the ONS’s preliminary estimate, GDP had declined by 0.5% during the fourth

quarter of 2010. The ONS had estimated that GDP would have remained broadly unchanged in the

absence of the snow during December. Service sector output had declined and the ONS believed that

the adverse weather had materially affected the output of this sector. Construction activity was

estimated to have declined sharply during the fourth quarter, and had also been affected by the bad

weather.

13 Abstracting from the effects of snow, the weakness in fourth-quarter GDP was consistent with a

number of interpretations. First, the data could prove erratic, or simply be revised up. The Index of

Production for December, released subsequent to the preliminary GDP estimate, had not by itself

pointed to a significant revision, although most of the weakness in activity had been concentrated in

the service sector. It was probable that growth in the first quarter would be buoyed to some extent,

both as the level of activity returned to normal after the snow, and possibly also by some postponed

expenditure. The CIPS/Markit business activity surveys for January, which provided an early

indicator of first quarter activity, had been quite strong.

14 Second, growth might have temporarily weakened around the turn of the year. Even without the

effects of the snow, the ONS had estimated that the economy slowed sharply in the fourth quarter.

And early indictors suggested that, stripping out the effects of the bounce back from the snow-affected

levels of activity in December, underlying growth in the first quarter could also be weak. As the

Committee had previously noted, recoveries from recessions were rarely smooth, so this would not be

unusual.

4

15 Finally, the data might presage a more prolonged period of weak growth. That could occur, for

example, if households chose to increase savings as the fiscal consolidation progressed. Measures of

consumer confidence, which had declined sharply in January, might indicate more cautious attitudes

towards spending.

16 The increase in the standard rate of VAT at the start of 2011 had created an incentive to bring

forward some consumption into the final quarter of 2010. The sharp fall in service sector output and

subdued retail sales growth, combined with reports from the Bank’s Agents, suggested, however, that

there had been significant weather-related disruption to consumption. It was therefore possible that the

disruption from snow was likely to have more than offset the VAT effect on the timing of household

spending.

17 Exports of goods and services had grown by 7.5% in the four quarters to 2010 Q3, considerably

faster than the 2000-07 average. More recent data had been consistent with continued growth, and

ONS data suggested that goods exports had grown robustly in the fourth quarter. But import growth

had also remained strong, with the result that net trade had continued to make less of a contribution to

GDP growth than the Committee had previously expected. It was unclear why import penetration had

declined by so little to date, given the substantial fall in sterling. One possibility was that there was a

mis-match between domestic productive capacity in certain industries and demand, which would take

time to rectify. It was also the case that the trade data were particularly prone to revision, cautioning

against drawing firm inferences from the apparent persistence of import penetration.

18 Some indicators of nominal spending continued to grow strongly. Nominal domestic demand

had increased by 6.8% in the four quarters to Q3, accompanied by nominal consumption growth of

6.3%, in part reflecting the VAT increase in January 2010. These were both above their average

growth rates for the decade before 2007. At 5.1%, overall nominal GDP growth had been somewhat

slower and, allowing for the VAT increase, slower still. Broad money growth remained weak.

Excluding the holdings of interbank intermediaries, broad money had increased by 3.0% on a

three-month annualised basis in December, well below its average growth rate prior to the recession.

There were a number of possible reasons, however, why subdued money growth might be consistent

with continued robust growth in nominal spending, including if companies relied less than previously

on bank credit to fund investment and banks continued to increase their capital.

5

Supply, costs and prices

19 Twelve-month CPI inflation had risen to 3.7% in December, up from 3.3% in the previous

month. In line with the usual pre-release arrangements, an advance estimate for twelve-month CPI

inflation in January of 4.0% had been provided to the Governor. A detailed breakdown was not

available but it seemed likely that increased petrol, furniture and household goods, catering, and

alcohol prices had contributed to the rise. More generally, it was difficult to identify how much of the

VAT increase had been passed through in January, complicating the interpretation of month-by-month

developments in CPI inflation around the turn of the year. The near-term outlook for inflation had

risen markedly relative to the November Inflation Report following further rises in commodity and

other import prices.

20 The available measures of inflation expectations were imperfect and had to be interpreted with

care. Surveys of near-term household inflation expectations had risen in recent months, but that was

consistent with the change in the Committee’s own expectation for near-term inflation. Evidence from

firms was more limited, but was also consistent with some increase in their near-term expectations.

Some of the survey measures of longer-term household inflation expectations had picked up in recent

months. Medium-term inflation expectations derived from financial markets had shown no discernible

trend over the past year as a whole. Lack of liquidity obscured the signal from shorter-term financial

market measures, but three to five-year measures had moved in line with the longer-horizon measures

which the Committee regularly monitored. Overall, there was little evidence that medium-term

inflation expectations had risen above a level consistent with the inflation target. That said, financial

market measures of uncertainty about medium-term inflation had been elevated for some time.

21 Total employment had fallen by 69,000 in the three months to November, according to the LFS

measure, as the number of both full-time and part-time employees had declined. This decline had

followed surprisingly strong increases during the summer. Drawing together the evidence from

published employment data and surveys, it seemed likely that overall employment had increased

gradually during the second half of 2010. Average hours worked had also increased slightly.

22 Evidence about the scale of spare capacity remained mixed. Survey measures of capacity

utilisation continued to point to a relatively limited amount of spare capacity and, consistent with this,

surveys also suggested that some companies intended to invest to expand their capacity. But the level

6

of labour productivity remained well below pre-recession trends, consistent with a greater degree of

spare capacity than implied by the surveys.

23 Earnings growth had remained subdued. Whole economy AWE regular pay had increased by

2.3% in the three months to November compared with a year earlier, and remained below its

pre-recession average. The start of each year was an important period for pay settlements. The Bank’s

Agents’ annual survey of pay intentions suggested that settlements might rise modestly in 2011. In

part that could reflect a recovery in productivity. Trends in earnings over the year would depend also

on the contributions of bonuses and regular pay drift.

The February GDP growth and inflation projections

24 The Committee reached its policy decision in the light of its projections to be published in the

Inflation Report on Wednesday 16 February. Expansionary monetary policy, combined with further

growth in global demand and the past depreciation of sterling, should ensure that the recovery in the

United Kingdom was maintained. But the continuing fiscal consolidation and squeeze on households’

purchasing power was likely to act as a brake. Abstracting from the effects of snow, growth around

the turn of the year appeared likely to have been somewhat weaker than expected at the time of the

November Inflation Report.

25 The outlook for growth remained highly uncertain. Private demand could grow rapidly, for

example if some businesses chose to use some of their cash balances to increase investment. But there

were significant downside risks to private demand, especially to household spending. In particular,

uncertainty about the impact of the fiscal consolidation and restrictions on the availability of credit

might cause consumption to grow more slowly than real disposable incomes. The improvement in net

trade would depend on the vigour of the global recovery and the degree of rebalancing prompted by

sterling’s past depreciation.

26 There remained a wider than usual range of views among Committee members about the outlook

for growth. The Committee continued to judge that relative to the most likely path the risks to growth

were skewed to the downside. Taking that skew into account, the Committee’s best collective

judgment was that GDP growth was about as likely to be above its historical average rate as below it in

the medium term. It was likely that some spare capacity would persist throughout the forecast period.

7

The distribution for the level of GDP was somewhat lower than assumed at the time of the November

Report.

27 Inflation was likely to pick up to between 4% and 5% in the near term, and to remain well above

the 2% target throughout 2011, boosted by the increase in VAT, higher energy and import prices, and

some rebuilding of companies’ margins. The projection for the first half of the forecast period was

markedly higher than in November, due largely to the recent increases in the prices of commodities

and other imported goods and services. During 2012, inflation was likely to fall back as those effects

waned and the downward pressure on wages and prices from the margin of spare capacity persisted.

The extent of that fall was likely to be moderated by companies continuing to rebuild their margins

and some upward drift in inflation expectations.

28 The prospects for inflation in the medium term were highly uncertain. Continued strong global

growth might lead to further upward pressure on commodity and other import prices. The degree of

spare capacity and its impact on inflation would depend on: the strength of demand; the impact of the

recession on potential productivity; the performance of the labour market; and the sensitivity of

wages to labour market slack. The profile for domestically generated inflation would also depend on

the extent and pace of any rebuilding of companies’ margins. And inflation would be higher, the more

that elevated outturns caused expectations of inflation to rise and that fed through into wage and price

setting.

29 There remained a wider than usual range of views among Committee members over the outlook

for inflation. On balance, the Committee judged that, conditioned on the assumption that Bank Rate

followed a path implied by market interest rates and that the stock of purchased assets financed by the

issuance of central bank reserves remained at £200 billion throughout the forecast period, the most

likely outcome was that inflation would fall a little below the target in the second half of the forecast

period, but that risks around that most likely outcome were skewed to the upside. Taking that skew

into account, the Committee’s best collective judgment was that the chances of inflation being either

above or below the 2% target in the medium term were broadly equal.

8

The immediate policy decision

30 The near-term outlook for inflation was markedly higher than at the time of the November

Inflation Report and inflation was likely to be between 4% and 5% for much of 2011. Nevertheless,

the Committee continued to expect inflation to fall back thereafter as the temporary impact of various

factors waned, and the margin of spare capacity in the economy continued to dampen inflationary

pressures.

31 As had been the case for some time, there were two key risks to this broad profile. The first was

that weak growth and persistent spare capacity might cause inflation to fall to well below the target in

the medium term. The main news about this risk over the past month had been the fourth-quarter

contraction of GDP. Even after making allowance for the probable impact of the adverse weather

conditions, growth had slowed during the second half of 2010. That apparent weakness could prove

temporary, but could also be an early signal of a worsening outlook for growth and hence

medium-term inflation. Monthly indicators for January gave conflicting signals: business activity

surveys had generally been upbeat, but consumer confidence had declined sharply.

32 The second risk was that the period of elevated inflation would persist for longer than the

Committee expected. That could occur if externally generated inflation pressures continued and were

not offset by exchange rate movements. One possibility was that the recent further increases in

commodity prices, which in many cases had been associated with strong growth in emerging market

economies, would continue. Committee members differed in the comfort they drew from the profile of

commodity futures prices when assessing the likelihood of that outcome. Second, it was also possible

that accommodative monetary policies in emerging market countries could result in higher inflation in

those countries. That too could influence UK prices unless offset by exchange rate movements. A

third possibility was that there might be further pass through from the past depreciation of sterling.

33 A rise in medium-term inflation expectations could also result in inflation remaining elevated for

longer than it otherwise would. Although there was limited evidence that those expectations had risen

materially to date, inflation was set to be higher, and above the target for longer, than had been the

case at the time of the November Inflation Report. The implications of this for inflation expectations

would depend on the extent to which households and firms extrapolated from past inflation trends

when forming their expectations; and whether they would revise their views about the likely time

9

horizon over which the Committee would seek to bring inflation back to the 2% target and the extent

to which that influenced their price and wage setting. The most recent Inflation Report projections

were consistent with some upward drift in inflation expectations.

34 Most members agreed that the balance of risks to inflation in the medium term relative to the

target had moved upwards in recent months and that the case for withdrawing some of the current

exceptionally accommodative monetary policy had consequently been strengthened.

35 For three members, the case for removing some monetary stimulus at this meeting was

compelling. For those members, the upside risks to the medium-term inflation outlook from global

inflationary pressures and the possibility that inflation expectations would move up outweighed the

downside risks to inflation associated with uncertainty about the strength of the recovery and the

possibility of persistent spare capacity. In part, this reflected a concern that the level of demand

consistent with achieving the inflation target might be lower than previously thought. Two of those

members favoured only a small tightening in policy, given the uncertainty about the economic outlook.

The third member concluded that a larger reduction in the degree of monetary stimulus had now

become appropriate. That member thought that there was mounting evidence that firms were able to

pass on cost increases to the prices they set and noted also that nominal domestic demand had been

growing for some time at near to the top of its typical range prior to the recession. In that member’s

view it was significantly more likely than not that inflation would overshoot the inflation target in the

medium term.

36 Other members concluded that there was not yet a case for a rise in Bank Rate. They had

differing views about the likelihood of the upside risk associated with an increase in inflation

expectations materialising. Some thought that this likelihood had grown, given that inflation was set

to be higher, and above target for longer, than previously expected. Others considered that the chances

of this risk materialising remained limited, given that the change in the near-term outlook could be

clearly explained by reference to recent increases in energy, other commodity and world export prices.

37 Of those members not favouring a rise in Bank Rate, some thought that the case for an increase

had nevertheless grown in strength. The Inflation Report projections implied that inflation was

roughly as likely to be above or below target in the medium term, and those projections had been

conditioned on a path for market interest rates which assumed an increase in Bank Rate around the

10

middle of the year. Given the potentially disruptive impact of reversing any immediate change in

Bank Rate, there was merit in waiting to see indicators of how the economy performed at the start of

the year to help assess whether or not the decline in GDP in the fourth quarter presaged sustained

economic weakness. A rise at this juncture could damage household and consumer confidence, which

remained fragile.

38 For one member, the balance of risks to inflation continued to warrant an expansion of the

Committee’s programme of asset purchases, financed by the issuance of central bank reserves, because

it was likely that inflation would fall to below the target in the medium term. This member believed

that the impact of short-term inflation expectations on future prices and wages would be lower than

assumed in the MPC’s February Inflation Report projection, and that consumption also would be

lower, both pushing down on medium-term inflation. This member acknowledged that a sustained

upward trend in global demand prospects or a shift in sentiment against sterling could outweigh the

domestic forces pushing down on inflation. But this member did not see this risk as yet large enough

to require a policy tightening.

39 The Governor invited the Committee to vote on the propositions that:

Bank Rate should be maintained at 0.5%;

The Bank of England should maintain the stock of asset purchases financed by the issuance

of central bank reserves at £200 billion.

Regarding Bank Rate, six members of the Committee (the Governor, Charles Bean, Paul Tucker, Paul

Fisher, David Miles and Adam Posen) voted in favour of the proposition. Three members of the

Committee voted against the proposition. Andrew Sentance preferred to increase Bank Rate by 50

basis points. Spencer Dale and Martin Weale preferred to increase Bank Rate by 25 basis points.

Regarding the stock of asset purchases, eight members of the Committee (the Governor, Charles Bean,

Paul Tucker, Spencer Dale, Paul Fisher, David Miles, Andrew Sentance and Martin Weale) voted in

favour of the proposition. Adam Posen voted against the proposition, preferring to increase the size of

the asset purchase programme by £50 billion to a total of £250 billion.

Brains1983

I predict 1:1 before the weekend. Hold off.

Mogs

IMO, I think current rate of around 6 ( is where it will stay (+- 0.3) for the next few years.

Not based on any inside info - just my gut feeling and historical trends.

lionheart

Can whoever knows the answer to that one please tell me what the FTSE will be at by the end of next year. Thanks.

kittycat1

Smartarse!

Millhouse

6 is the long term average. It's the 'right' number in my view. 7.3 was a blip, just as 5.3 was.

I guess, if they do increase rates in the UK in August as some are speculating (due to the high UK inflation) then you might start seeing it moving to 6.2+. In any case, it's probably not going back to 5.3 any time soon.

Now sit back and watch me be proved 100% wrong.

typical

You can get plenty of opinions, but it's very hard to predict the currency markets - in fact, with standard models, it's probably impossible to predict currency movements with any more reliability than a naive random walk: the mathematical equivalent of rolling the dice.

However, my old finance professor did tell me "Get out of the dollar. Now." last month.

Millhouse

The dollar will be fine until the oil producing arab states start using the Rembi as the reserve currency.

Oh, hang on.

typical

hi555

based on history it will be in the current range for the foreseable future

The Dean

I've been employed in the foreign exchange markets for over thirty years. I am widely consulted for radio shows, magazine articles, etc, and often speak at seminars and conferences on the topic.......

In short, I am regarded as something of an expert.

And I can state proudly and unequivocally that, when I make exchange rate predictions, I get it right about 55 pct of the time...............

Millhouse

5% better than the random walk mate. Well done.


*EDIT> I'm not being sarcastic