Coming as little surprise to investors, the Bank of England announced that interest will remain unchanged at 0.5%, alongside the level of quantitative easing holding at £200 billion.
With a Budget due in a little less than two weeks, the Bank is expected to remain on the sidelines. They are likely to wait and see what impact the fiscal tightening has on the economy before revising their latest projections.
Duncan Higgins, senior analyst at Caxton FX says, “With spending cuts and tax rises just around the corner we are unlikely to see a change in interest rates this year. The fear is that the measures the government is due to implement could destabilise the recovery and raising rates prematurely would exacerbate the problem.”
In the past few months pressure has been building that the rising level of inflation would force the Bank to intervene and raise rates, but these pressures are easing.
“The Bank has stubbornly stuck to its line that inflation will fall below the 2.0% target in the medium term, despite growing dissent. Increasingly, factors do point to inflation subsiding. Troubles in the eurozone are showing little sign of easing and falling demand from the continent will put downward pressure on prices. This will be compounded by weaker domestic demand as the full impact of tax increases and spending cuts is felt,” comments Higgins.
The markets have shown little reaction to the Bank’s decision and sterling is continuing to steadily appreciate ahead of the ECB’s press conference this afternoon.
Duncan Higgins continues, “The ECB is particularly pressured at the moment and internal conflicts are not helping. Officials will be keen to give speculators as little ammunition as possible, and we expect the information provided to be as vague as they can justifiably get away with.”
At present sterling is trading back near its 18-month high hit on Monday, but could move higher if Trichet fails to downplay growing fears about the eurozone’s financial stability.
