Pound Falls against South African Rand Despite BoE Inflation Comments

The Pound posted widespread declines on Wednesday in reaction to the release of minutes from the most recent Bank of England policy meeting. The minutes outlined a change of heart among policymakers on the subject of interest rates. Monetary Policy Committee members Martin Weale and Ian McCafferty had previously voted in favour of immediate interest rate increases in the belief that the UK economy was strong enough to withstand the adjustment. However, these two rate hawks became doves in January and retracted their votes as a result of the UK’s softer inflation outlook. The minutes counteracted the positive impact of a better-than-forecast domestic unemployment reading and on-target average earnings figures and the Pound fell across the board.

On Thursday the Pound recovered some losses in response to comments issued by BoE official David Miles. Although the pace of UK inflation fell to 0.5% last month, Miles asserted that the nation isn’t on a deflationary path and argued that consumers will feel the benefit of lower prices. Miles commented; ‘although actual inflation rate is now very low, and might temporarily dip down to zero and turn slightly negative, this is a long way from the sort of deflation trap that is really worrying. This fall in inflation, rather than increasing the burden of debt in a way that can become self-reinforcing in a downwards spiral, is boosting the disposable income of households and making the burden of debt easier. I don’t think this really adds up to a strong case for looking to monetary policy to boost demand and prices right now.’

However, as the UK’s budget deficit was shown to have increased unexpectedly, the Pound’s gains were limited. The Pound to South African Rand exchange rate was actually trading in a weaker position before the ECB’s hotly anticipated policy announcement, although the Rand did lose ground against both the Euro and US Dollar. According to one local dealer; ‘The more [the ECB] throw at the situation the more likely it is that investors will continue to reduce their European holdings and throw them at the high-yielders, like the Rand. If they do less than the market has priced in, then the Euro will pop higher (weaken) and the Rand may actually follow suit, but only temporarily.’

After the ECB outlined an asset purchase programme worth 60 billion Euros a month, the Euro plummeted against the Pound, Australian Dollar and US Dollar – shedding over 1% against each. The Rand, however, extended gains against the Pound, taking its advance to around 0.6%, amid expectations that the increased liquidity in the Eurozone would support South Africa’s economy.