Sterling Suffers Following Further QE Speculation

The pound has started this morning with the words of Bank of England policy maker David Miles ringing in it’s ears after he has stated that the central bank may yet come to use further quantitative easing.

Sterling hit a one week low as Miles said that QE remained a “potentially powerful tool”, although he continued stating that he was very uncertain about what the growth and inflation expectations are in the UK.

The pound fell almost a cent against the dollar, and lost most of the gains that we saw overnight against the Euro.

These comments came after Sterling started it’s week with plenty to look out for as an onslaught of fundamentals were thrown it’s way which is set to test the resilience of the pound looks set to be tested once more.

The news has been largely underwhelming for the medium term outlook with overnight BRC retail sales for September disappointing somewhat, showing sales growth slowing, led by a drop in the demand for big ticket items.

Meanwhile the BCC quarterly trends survey showed the economy slowing sharply in Q3 with the RICS housing survey also disappointing.

Respite for the UK came in the form of UK Consumer Prices Index (CPI) as inflation remained unchanged at 3.1% in September according to the Office for National Statistics. Analysts said that a higher-than-expected CPI figure would have dampened expectations that the Bank of England would opt for more quantitative easing.

The Retail Prices Index, which includes a higher proportion of housing costs, fell back slightly to 4.6%. September's figure is of key importance to claimants as it sets the rate at which benefits change in April.
Most benefits are now linked to the CPI and will rise by 3.1%, but pensions will increase by the higher 4.6% RPI. RPI - which factors in a greater chunk of the cost of housing - is also important for wage negotiations.

The inflation linking for welfare payments was changed in the Budget from RPI, which is generally higher than CPI and should therefore lead to savings for the government. The higher RPI benchmark for pensions will not apply until next April. The ONS said there were both significant upward and downward pressures on inflation in September.

Clothing and footwear prices saw a record rise, but airfares fell by 27.8% after rising by a record 16% in August. Although the CPI figure remains above the 2% target - and has been there for 10 months in a row - the Bank of England expects that to be temporary and interest rates are likely to remain at their record low levels.

Some business groups are calling for monetary policy to become looser, arguing that the Bank may have to pump more money into the economy by way of another round of quantitative easing.

Sterling will look to tomorrow with UK unemployment data being released which may provide some positive direction coming into the market place.