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BOE Meeting Minutes

Written by A Forex View From Afar on Wednesday, January 21, 2009

Today, the minutes from the BoE meeting held on 7-8 January were released. The report showed that the vote was not unanimous, with eight votes for a 50 basis point rate cut, and one for a larger, 100 basis point rate cut.

Apart from this, the January meeting brought something new. It was the first time in the current easing cycle that the bank discussed to leave the interest rate unchanged.

Until now, the bank’s assessment was that the inflation read is in big danger of “undershooting” the bank’s target, now it seems some parts of this risk have vanished, helped by the on-going rate cuts and a huge depreciation in the pound’s value. The central bank’s view is now that the risk is somewhat balanced.

In the last few lines of the minutes, the bank inserted a vital clue that helps anchor future expectations. The minutes show that the bank has acted preemptively until now and, in case the economic outlook does not shift any further to the downside, it would be wrong to view any rate cuts forthcoming.

However, the Committee voted for a 50 basis points rate cut, in order not to damage the market’s confidence in the financial system and in the real economy. A detached vote came from Mr. Blanchflower who called for a 100 basis point rate cut. As a note, most market participants are used to Mr. Blanchflower’s bearish view, so this vote can be easily ignored.

The meeting’s minutes came at a good moment for the pound. The pair shed 1/3 of its value in the last year, falling more than during the “Black Wednesday” event, when the U.K. was forced to abandon the European Exchange Rate Mechanism.

An additional look on the daily chart shows that since the pound has traded freely, after the 1992 occurrence, it never went any lower than the 1.40 area. This suggests that the pound may see, in the short-term at least, some upward pressure, bouncing off a very strong support area, also sustained by a fundamental shift.

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