Their main objective is to meet the inflation target Price commonly called Retail Index.
For this, the MPC uses different tools and meets once a month to discuss the outline to follow. Among these tools, the most important are:
- The Bank Repo Rate: This is the director of the central bank influences interest rates of commercial banks to rate. So this rate strongly influences the economy and consumption.
- Direct intervention in the market through operations of purchase / sale of bonds and if necessary, GBP on the spot market. They help to ensure the necessary liquidity to the implementation of new policies and interest rates.
The high interest rates on the pound promote operations “carry trade.” In fact, investors are placed along the GBP against other currencies to take advantage of positive rate differentials. The GBP / JPY are popular for this type of operation. Since the Bank Repo Rate is the main instrument of the British monetary policy, it is necessary to anticipate cuts or rate increases before taking a position on the pound.
This involves listening carefully to the views of members and senior representatives of the BoE and MPC but also the Future short sterling three months usually gives a good indication of future decisions.
In fact, when the three-month rates (represented by the value of the Future) are the current rates of the BoE, it means that investors lean towards maintaining interest rates at their current level. If they are higher, investors expect higher rates and vice versa.
On the other hand, it is interesting to note that the GBP tends to rise when the price of energy increases. Indeed, the United Kingdom is a major producer of energy (10% of GDP comes from this sector) and the price increase implies increasing and additional purchases of GBP for importing countries income.
Originally posted 2013-08-07 05:24:18. Republished by Blog Post Promoter