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Sterling Finds Support after First MPC Split Vote in More than 3 Years

H.S. Borji
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Sterling Finds Support after First MPC Split Vote in More than 3 Years

The British pound strengthened on Wednesday after the Bank of England said two policymakers voted to increase interest rates this month, marking the first split vote on interest rates in more than three years.

The minutes of the August 6-7 Monetary Policy Committee meetings revealed that two policymakers – Martine Weale and Ian McCafferty – voted to raise the benchmark rate by 25 basis points to 0.75 percent. They were outvoted by the seven other committee members, who decided to hold interest rates at a record low of 0.5 percent.

“For two members, in particular, economic circumstances were sufficient to justify an immediate rise in Bank Rate,” the minutes of the August 6-7 meetings said.

”These members noted that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up. They noted that it was possible that wages were lagging developments in the labour market to some extent.”

Weale is a renowned hawk who voted in favour of higher interest rates in 2011 and opposed the Bank’s forward guidance last August.

McCafferty, who joined the nine-member MPC responsible for setting interest rates in 2012, has previously voiced concerns about lagging British productivity and its role in pushing up inflation.

Both members believe an early rate hike would set the pace for more gradual increases in the future.

The August meetings marked the first time in more than three years policymakers were split on how to proceed with interest rates.

Sterling, which has been mired in a downward spiral for more than a month, advanced against all of its 16 major peers.

The pound rebounded sharply against the euro, as the EURGBP tumbled 0.42 percent to 0.7981. The pair is likely supported at 0.7962. Initial resistance is likely found at 0.8036.

Sterling surged 0.56 percent against the Japanese yen, sending the GBPJPY to 171.95. The pair faces initial support at 170.59 and resistance at 172.06. A breach of the latter would bring the pair closer to its 100-day simple moving average.

The pound advanced 0.21 percent against the US dollar, as the GBPUSD traded at 1.6651. The pair reached an intraday high of 1.6679. Initial support is likely found at 1.6574 and resistance at 1.6694.

The GBPUSD has declined 2.7 percent since July 1, as it became abundantly clear to the markets the Bank of England would hold off on raising interest rates this year. Disappointing earnings growth and weaker inflation have ruled out the possibility of a rate hike in the short-term, which has lessened the appeal of the pound.

While the possibility of a 2014 rate hike is slim, the latest vote count suggests policymakers are gradually warming to the idea of higher interest rates. The minutes of the August 6-7 meetings were clearly more hawkish than the quarterly Inflation Report, where the BOE cut its wage growth forecast to 1.25 percent.

The Bank upgraded its 2014 economic growth forecast to 3.5 percent from 3.4 percent. For 2015 it forecast growth at 3 percent, up from a previous estimate of 2.9 percent.

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