The UK economy keeps pushing forward and the recovery is broadening. The rise in housing prices is not limited to London and the recovery is not limited to the housing sector. The recent drop in the unemployment rate from 6.8% in March to 6.6% in April, accompanied by another steady drop in the number of jobless claims, puts more pressure for a rate hike on Carney.
So far, Carney has been reluctant to act: he does not want to push a stick in the wheels of the recovery. Raising the rates or bringing forward hike expectations could have an immediate impact on the exchange rate of sterling, thus impacting exports, an area of the economy that UK British policymakers would like to see growing.
The level of inflation has stopped dropping and stabilized at 1.8% in the last read. This still gives Carney some breathing space, at least for now. A stronger exchange rate would push inflation lower. A stronger inflation rate would be a stronger trigger than housing prices and a rapid drop in unemployment.
Nevertheless, even if inflation remains close to target (2%) the central bank’s action have an impact on inflation only at a later date. A responsible central bank stays ahead of the curve and works to counter changes in prices before they occur and not after the train has already left the station.
Mark Carney is not alone in the Monetary Policy Committee. In nearly one year, colleagues of the Canadian have voted unanimously with the new chief. We cannot rule out the possibility that one or two members already voted for a rate hike in June’s no-change decision. The meeting minutes from this decision are released on Wednesday, June 18th, just one day after the inflation numbers. These will be a critical two days for the British pound, and GBP/USD could top 1.70, especially if it is revealed that one member voted to hike the rates.
Even if no one voted against Carney on the June 5th decision, the improving economy and the incessant talk of a housing bubble could trigger a rate hike in late 2014 rather than in Q2 2015. Such a change in expectations could have an immediate effect on sterling against its peers. The gradual grind of EUR/GBP towards 0.80 could turn into a collapse below this level.
For more, see the GBP forecast.
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