Rate hold will ease pressure on sterling

The Bank of England has decided to leave interest rates unchanged at 5.5% offering some much needed respite for Sterling according to currency specialists HiFX.

Chris Towner, Currency Strategist at HiFX explains, “Sterling has been under considerable pressure following the Northern Rock crisis and concerns surrounding the UK economy. Although the market is now pricing in the high probability of a cut when the MPC next meet in February, plus another cut in the second quarter of 2008, it must be noted that GBP has already been sold off quite aggressively in anticipation of rate cuts. Having seen this sharp sell off over the Christmas period and into the start of this year a rally for Sterling would offer some comfort to UK importers who have felt the pinch of a weaker currency especially against the strong Euro. UK companies with an exposure to the US dollar will now need to focus on the Fed's decision at the end of the month as the whole sub prime issue originated in the US and it is a close call between whether they cut by 25bps or a more poignant 50bps.“

The UK decision to leave rates unchanged was another close call as policymakers juggled the risks of a slowing economy with rising inflationary pressures. Last month’s rate cut of 0.25% was the first cut for two years backed by all nine members of the MPC and came about amid renewed worries in the global money markets.

Towner continues, “Leaving rates on hold this month gives the Bank of England time to take stock and establish how the retail sector faired over the crucial Christmas period and whether the money markets continue to thaw.

“Since December’s interest rate announcement, inter-bank lending rates have fallen dramatically, lessening the urgency for a rate cut. However, the recent depreciation of Sterling will add additional inflationary pressures, as imports become more expensive. Following today’s decision to leave rates on hold, there is now a high probability that the MPC will look to cut rates in February, when the Bank updates its economic growth and inflation forecasts.”