Pound Falls on BOE Minutes and Joblosses

12-17-2008 16:32

Monetary Policy Committee were unanimous when they voted for 100 basis points rate cut at their latest meeting, the minutes from the Bank of England (BOE) showed today. The policy makers considered the need for even a larger reduction but decided to avoid it because they were worry about the negative effect on the sterling exchange rate.

Joblosses Accelerates

As the recession deepens, businesses try to reduce costs by cutting output and the number of workers. Today report from the Office for National Statistics showed that Jobless claims rose in the U.K. by 75,700 in November, bringing total claims to 1.07 millions which is the highest in eight years.

Rising unemployment, which reached to 6.0 percent according to the today's report, could pave the way for the BOE to cut the bank rate further, possibly close to zero. Federal Reserve has already cut its target rate to zero, raising speculations that other central banks may be eventually forced to do the same.

U.K. Inflation Falls

Inflationary pressures continue to ease at the cost of sharp slowdown in economic activities. A report on Tuesday showed that Consumer Price Index (CPI) fell in November to 4.1 percent annually.

While the inflation is still more than the 2.0 percent target, the BOE is worry that the "inflation would substantially undershoot the target in the medium term", the minutes showed. Mervyn King, the Bank of England Governor, didn't rule out the possibility of cutting rate to zero, and said that he will take all necessary actions to bring inflation back to the target.

Pound Weakens

British pound weakened today against the major currencies as the BOE's minutes signaled that more rate cuts are probably ahead. Euro rose for the second day against the pound, touched 0.9150 in European markets.

A report tomorrow is also expected to show that retail sales in the Britain fell 0.4 percent in November as the consumers, struggling with falling home prices, tight credit market, and deteriorated jobs conditions, continue to cut back on spending, raising pressure on the BOE to cut rate again in their next meeting in Jan. 8.