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Sterling climbs as MPC members back Carney’s forward guidance

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14/08/2013
Sterling rose against other major currencies this morning after it was revealed that most members of the Monetary Policy Committee backed Mark Carney's guidance on interest rate policy.
Sterling climbs as MPC members back Carney’s forward guidance

The pound was up 0.4% against the dollar and 0.3% against the euro shortly after the announcement, while the yield on 10-year gilts rose 3.2 basis points to 2.63%.

The currency strengthened after it emerged eight out of the nine MPC members voted in favour of the policy shake-up, which last week saw the Governor indicate to the market how long he intends to hold the base rate at a record low.

Carney announced rates will not rise until the unemployment rate falls back below the 7% mark. It is currently near 8%.

The minutes of the meeting held on 31 July and 1 August also show the committee voted unanimously to leave the Bank’s quantitative easing programme unchanged at £375bn.

However, the MPC said it “stands ready to undertake further asset purchases while the LFS unemployment rate remains above 7% if it judges additional monetary stimulus is warranted.”

The minutes said most members wanted to first gauge the impact of the guidance on asset prices before considering the case for another round of stimulus.

The dissenter on forward guidance was Martin Weale, who voted for a time horizon for the first inflation ‘knockout’ that was shorter than proposed.

Forward guidance is subject to caveats, including two related to price stability. One of those is a ‘knockout’ if inflation is seen more than half a percentage point above the Bank’s 2% target over the next 18-24 months. Weale said he wanted to see a shorter time horizon, but did not disagree with the principle of Carney’s policy.

With the unemployment rate now a major factor for the MPC to consider, all eyes were on the latest update from the Office for National Statistics (ONS) which was also released today.

The unemployment rate in the second quarter of the year was unchanged at 7.8%, holding at the same level as Q1, although it has fallen 0.2 percentage points from a year earlier.

The total number of unemployed people in Q2 was 2.51 million, down 4,000 from January to March and down 49,000 from a year earlier.

The employment rate for those aged between 16 and 64 was 71.5%, up 0.1 percentage points from January to March.

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