Daily Market Report - 21/08/2014

The Bank of England’s Monetary Policy Committee was yesterday split about when to raise interest rates. Two members, Martin Weale and Ian McCafferty, broke with consensus and voted to raise borrowing costs by 25 basis points, to 0.75%. They believe that the UK economy is strong enough to justify an immediate rise in the interest rate and that earnings across the UK economy are likely to pick up in the months ahead, meaning the Bank of England should start to tighten monetary policy now. 

Other members voted to keep interest rates at 0.5% because they believe there is insufficient evidence of inflationary pressures to justify a rate rise. This was backed up by Tuesdays fall in inflation. They want to leave interest rates at their record low of 0.5% until there are clear signs that wages are rising.

The news is significant because it is the first time that Britain’s monetary policy has been split over interest rates since 2011 (rates have been unchanged at 0.5% since March 2009). The pound has jumped half a cent against the US dollar, to $1.6665 as the news was announced. 
The minutes from the Federal Reserve yesterday also showed the USA may look to increase interest rates sooner than expected. The Fed said yesterday that it may be appropriate to remove monetary policy accommodation if the Feds goals were met earlier than it was forecast. Recent good jobs data has added weight to this argument.

Key Announcements:

EUR – 9:00 – German Markit Services PMI expected to fall to 55.5
EUR – 9:00 – German Manufacturing PMI expected to fall to 51.8
GBP – 9:30 – Retail Sales expected to rise by 0.4%
USA – 1:30 – Initial Jobless Claims expected to fall to 299K

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