Dovish MPC minutes furthers sterling’s slide

As was forecast, the August Monetary Policy Committee minutes revealed a vote of eight to one in favour of maintaining the base rate of interest at 0.5%. The downbeat tone of the report has put further pressure on sterling.

Andrew Sentance remained the sole dissenting voice among the ranks, voting for the fourth consecutive month to raise rates by 25 basis points. Amid the deterioration of UK data recently, there had been some speculation that Sentance would have backed off this month, but for the time being he remains steadfast.

Aside from Sentance's vote, the minutes have revealed an increased sense of caution among the MPC members. Although the report does highlight a difference of opinion, a number of members indicated that ‘the headwinds to recovery were somewhat stronger than previously thought, and the downside risks to activity had increased.'

Duncan Higgins, senior analyst at Caxton FX comments, "On balance the minutes have struck a rather dovish tone, which has taken the edge off sterling. The report alludes to greater downside risks in the wake of recent developments and the prospect of further stimulus is still very much on the table."

Despite the consumer price index holding at 3.1% last month, the members see little change in the upside risk to inflation. ‘As long as inflationary pressures are downplayed, it appears the door is likely to remain open to further quantitative easing, a prospect that will continue to weigh on sterling going forward.'

The report has seen sterling tumble further against the euro this morning.

Higgins notes, "In offering a comparatively bleak assessment of the recovery, the minutes have taken the pound back below 1.18."

"At least in the short term, it's looking increasingly likely that sterling will be stuck at these levels below €1.20. Owing to the Fed's recent policy statement and with the peripheral eurozone countries also enjoying a solid level of demand for their debt, the euro has surged against the dollar. This strength is spilling over and it could be a struggle for sterling to recover back to 1.20 in the short term," concludes Higgins.