The Bank of England (BoE) is in a bit of a quandary.
Governor Mark Carney doesn't really want to reverse the post-Brexit interest rate cut to 0.25%, because he's not keen to admit that he panicked. But inflation as we pointed out this morning - has just hit 2.9%, and unless Carney is very lucky, it won't be long before he has to write a note to chancellor Philip Hammond, explaining why he's not making any effort to contain it.
So he needs to make the right noises, even if he doesn't make the right moves. And at the BoE rate-setting meeting today, that's what he did.
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The Monetary Policy Committee voted by seven votes to two to keep the bank rate at 0.25%. Normally that would have sent the pound even lower (sterling bulls had been hoping for a 6-3 or even a 5-4 vote). They kept the current round of money printing too.
However, the "dovish" vote was accompanied by a very "hawkish" statement. For a start, the Bank noted that the economy was looking stronger than it had expected. But more importantly, the Bank warned that everyone on the MPC reckoned that assuming the economy keeps going the way it is now "then monetary policy could need to be tightened by a somewhat greater extent than current market expectations."
On top of that, the majority of MPC members believed "some withdrawal of monetary stimulus was likely to be appropriate over the coming months".
That was enough to put a rocket under the pound. It surged higher against both the US dollar and the euro. Chris Giles at the Financial Times reckons the Bank is now looking to raise rates in November, as does Paul Hollingsworth at Capital Economics.
It's impressive that the market still laps up this "forward guidance" stuff from Carney, given that he's been wrong or bluffing about it on almost every other occasion.
At the same time, it's hard to see how there's any real justification for rates being left at current levels at all never mind hiking faster than the market expects, there was plenty of reason to hike at this particular meeting. So maybe markets think he's running out of excuses.
But in any case, the pound - which recently has seen a barrage of pundits calling for "parity" with the euro has been primed for a comeback after its recent kicking.
Sometimes all the market needs is an excuse, and Carney gave them that excuse.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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