Little more than a week after Mervyn King, governor of the Bank of England (BoE), performed an about turn on the benefits of sterling weakness, more members of the central bank’s Monetary Policy Committee (MPC) have issued a warning over weakness in the currency.
However, there is a big difference between encouraging further weakness in the pound and promoting sterling strength.
The minutes of the March MPC meeting showed that all nine members of the committee voted to keep rates on hold, but three members, including King, voted to increase the Banks asset purchase scheme by £25 billion to £400 billion.
Those voting against further UK monetary stimulus, however, noted that with inflation above the BoEs 2% target and likely to stay there for some time, there was a risk that further action to boost growth could lead to inflation expectations drifting upwards.
That, they said, might lead to an unwarranted depreciation of sterling if it were misinterpreted as a lack of commitment to maintaining low inflation in the medium term.
True, the Bank noted it was appropriate to accommodate the first-round impact on inflation of the fall in sterling it has dropped more than 6% on a trade-weighted basis so far this year due to its beneficial effects in rebalancing the UK economys trade position.
However, the comments over further sterling weakness, which followed Kings recent remarks that the pound was now fairly valued, appear to indicate that the BoE is concerned that the market believes it has dropped its inflation target.
Indeed, that mention of the currency saw GBPUSD, which was making a fresh attempt to push down through $1.50 ahead of the release, surge higher, rising over a big figure to stand just below $1.5150.
Put another way, it seems King now believes that, at current levels, sterling strikes a balance between enhanced growth potential and acceptable inflation risks.
That might all be very well, but it begs the question whether the BoE would be willing to back this view with any policy action should the pound weaken further.
Will the Bank be willing to cut its asset purchase plan or raise rates to defend the pound?
Neil Mellor, currency strategist at Bank of New York Mellon, says the only plausible answer to that question is no.
As such, there is no obvious case to be made for sterling to post any lasting recovery from current levels, he says.
Indeed, Wednesdays UK Budget from chancellor George Osborne is likely to reinforce the economys reliance on monetary policy and an external adjustment which requires a competitive currency, with the consensus in the market that the government has little room to announce substantial fiscal stimulus measures.
Of course, that leaves the Bank, irrespective of whether Osborne changes its policy remit, bearing the burden of trying to promote growth in the UK economy.
All in all, sterling may have arrived at levels previously envisaged by the Bank of England governor, but whether the market should take note is another matter entirely, says Mellor.
The BoE might be fighting to win back some of its inflation fighting credibility, but the headwinds for sterling remain.