Sterling Buoyed Following BoE Decision

As was widely expected, the Bank of England (BoE) left interest rates unchanged at 0.50% again this month and chose not to extend the quantitative easing programme beyond its £200bn limit.

The decision has given sterling a slight lift to bring it away from its day lows, which were hit following Barclays announcement of “disappointing” second quarter profits.

BoE Governor Mervyn King reiterated recently that it may be a “considerable” time before the benchmark rate returns to “normal”. Although this announcement offers few surprises, minutes to the meeting, due to be released on the 18 August, could offer up some interest with a split widening between the Monetary Policy Committee (MPC) members about the danger posed by rising prices, according to Caxton FX.

Duncan Higgins, senior analyst at Caxton FX, said: “The views within the MPC are clearly divided. Andrew Sentence is expected to have voted for an interest rate rise for now the third month in a row. However, despite the UK’s strong rate of growth in the second quarter, there is little to suggest that he will find any support from his colleagues. King appears happy to tolerate the comparatively high level of inflation in order to safeguard the recovery.”

The rhetoric at present is still not pointing to an interest rate rise until mid-2011 at the earliest. This is based on the fact that the possibility of adding further monetary stimulus is still very much on the table.

“With budget cuts implemented and the debt crisis in the eurozone, the UK economy is unlikely to offer up the same level of growth in the third quarter as it did in the second. In fact economic figures for July already reflect a slight slowdown in activity. In the short term, the Bank can do little about inflation and so policymakers are likely to continue taking a wait-and-see approach while the outlook remains so uncertain,” said Higgins.

“Sterling has recovered from its day low against both the euro and the US dollar following the announcement, but progress remains slow. Having neared US$1.60 on Wednesday, the pound is unlikely to push through that level amid caution ahead of Friday’s US non-farm payroll figures,” he added.

At present sterling remains range bound between 1.20 and 1.21 against the euro, and is trading just above 1.59 against the US dollar.


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