Friday, 11 February 2011

Sterling up despite BoE leaving rates on hold

11th February 2011
Good morning. After the Bank of England left interest rates on hold Sterling fell as expected. Later in the day however the pound bounced back on expectations rates would need to rise later in the year. At 08:30am this morning rates are as follows:

  • GBP/EUR 1.1856
  • GBP/USD 1.6063
  • GBP/AUD 1.6101
  • GBP/NZD 2.1218
  • GBP/CAD 1.6014
  • GBP/CHF 1.5588
  • GBP/ZAR 11.682
  • GBP/JPY 134.04
  • GBP/HUF 322.89
  • GBP/NOK 9.4272
  • EUR/USD 1.3548

Bank of England keep interest rates on hold

The Bank of England's Monetary Policy Committee (MPC) has kept UK interest rates on hold at 0.5%, and unveiled no new quantitative easing measures. Both decisions were expected, but the level of division will not be clear until the minutes of the meeting are released.

Immediately after the decision Sterling fell sharply as there was a small chance that rates may have risen. The dip was short lived however, and later in the afternoon Sterling recovered on expectations that interest rates will rise later this year.

At the MPC's January meeting, there was a three-way split among its nine members, with 2 voting for a rate rise and and one for more QE. So the Bank faces a difficult choice to either keep interest rates low to try to aid the economic recovery, or raise them to try to cool inflation.

Raising rates takes demand out of the economy and slows down inflation. But it also increases the cost of borrowing and there are concerns this may tip the economy back into recession. Higher rates also strengthen the pound due to the higher yield for investors.

As the CBI Chief economist said yesterday "The MPC is right to hold off on rate rises for now as an increase will do little to alter the path of inflation in the short term, which is being driven higher by commodity prices and tax," He added, "The contraction across the economy in the final months of 2010 may well have been a blip, but as the bigger risk now appears to be growth, the MPC should continue to hold steady until the picture becomes clearer and the economy is firmly back on an upward track," she added.

So, the uncertainty over if and when rates will rise continues, and this is causing the upward and downward swings in the value of Sterling at the moment. It's likely this volatility will continue depending on how further economic figures are.

Today's Data

We end the week with Inflation data for the UK. High inflation supports the case for an interest rate hike, and it’s this speculation that’s driving strength in the pound at the moment. So, higher than expected figures could give the pound a lift. US Consumer Sentiment ends the week.

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