UK Interest Rates Left Unchanged – Expect a Rise in June, Says Caxton FX

Interest rates are unlikely to change until June, reports Caxton FX, in response to the Bank of England’s (BoE) announcement to keep policy unchanged, leaving the base rate on hold at 0.50% where it has now been for two years. Even amid rising inflationary pressures, the BoE is wary of destabilising the economic recovery at this stage.

Duncan Higgins, senior analyst at Caxton FX, said: “Given [Jean-Claude] Trichet’s recent hawkish comments, and with inflation running significantly higher in the UK than it is in the eurozone, the pressure on Mervyn King to act is building. However, the majority of the MPC [Monetary Policy Committee] members still want to see clearer evidence that the economy can accommodate a rate rise before joining the hawkish camp. We may see a fourth vote added in favour of a rate rise this month, but I do not envisage the BoE raising rates before June – by which time there should be firmer evidence that economic conditions are improving.”

While UK headline inflation is double the BoE’s 2% target, the general consensus remains that the UK’s economic recovery is too fragile for monetary tightening. The UK’s latest growth figure was negative and there is still broad uncertainty regarding the impact of the UK’s austerity measures.

Richard Driver, analyst at Caxton FX, added: “At last month’s MPC meeting, resident hawks Andrew Sentance and Martin Weale recruited Spencer Dale to their cause, but remained outnumbered by 6:3. The ECB [European Central Bank] effectively turned up the heat on the MPC by indicating an April rate rise in response to far less alarming inflation levels. So when the MPC minutes are released in a fortnight it would not be a shock to learn that another member has voted in favour of monetary tightening.

“Given that the announcement met expectations, the impact on sterling’s performance has been muted. The focus for the market is now on the EU summit this weekend, where officials will attempt to work towards an agreement on the eurozone’s fiscal troubles.”


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