The Bank of England (BoE) has concluded that the economy is in too fragile a state to risk an interest rate rise. Despite a rising tide of speculation to the contrary, the BoE decided to keep policy unchanged, leaving the base rate on hold at 0.50%.
Duncan Higgins, market analyst at Caxton FX, explained: “To date only two of the nine policy members have voted in favour of raising rates and it was always unlikely that a further three had been converted during the past month. It is well known that inflation looks set to remain well outside of the acceptable range, but a move this month would have been premature. Even amid stronger economic figures for January, evidence of a sustainable recovery is still thin on the ground, particularly in the face of the austerity measures.
“Sterling has lost a little ground following on from the announcement, but I do not expect this to be much more than a blip – especially with the meeting’s minutes likely to reveal two members still in favour of raising rates. The fact that we haven’t seen a shift in policy this month should heighten speculation about such a move happening in March. If we see a continued improvement in economic figures the argument for a rate rise will gather credibility, which should underline sterling demand.”
A combination of factors has brought forward the market’s expectation for the next rate rise from the BoE, which has contributed to recent sterling strength. Higgins concluded: “It’s unlikely the Bank will move before May – but that won’t stop the market speculating. As long as the BoE looks set to remain ahead of the interest rate curve when compared to either the Fed or the ECB, the pound should keep the advantage.”
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