Sterling loses ground to the euro following central bank decisions

Sterling weakened against the euro yesterday following the Bank of England’s interest rate decision. After a rise earlier in the day, the pound lost ground against most major currencies after the Bank of England decided to maintain its key interest rate at a historical low of 0.5% but expand its asset buying programme by a further £50 billion. This will result in the central bank using £125bn of the £150bn of newly created money to buy further government and corporate bonds. This will continue for another 3 months until the end of August.

At its meeting in Frankfurt, the European Central Bank reduced its the interest rate by 25 basis points to 1.00%, a decision which was in line with expectations. The ECB also announced quantitative easing measures to boost the eurozone economy, planning to spend about £53.6bn buying covered bank bonds following widespread criticism that they haven’t been doing enough to revive the economy. ECB President Jean-Claude Trichet also stated that their decision to cut interest rates by 25 basis points was appropriate at this time, but did not rule out further cuts in the future. Some ECB policymakers do not favor a benchmark interest rate below 1%: Germany's Axel Weber is of the view that if the interest rate falls below 1%, banks will have no incentive to lend to each other, paralyzing interbank lending, while Italy's Lorenzo Bini Smaghi has also put forward a similar opinion.

On Monday, the European Commission sharply lowered the GDP outlook for the euro area, which is now expected to contract 4% in 2009 and 0.1% next year, compared with its interim forecast back in January when the commission said the euro area will contract 1.9% in 2009 and will grow 0.4% in 2010. The eurozone unemployment rate is predicted to rise to 11.5% from 9.9% this year. The International Monetary Fund expects the Eurozone to contract 4.2% this year.

In the UK, Producer Price Index data will be released at 09.30 BST today, and in Germany Industrial Production will be announced at 11.00 BST.