Rates on hold should sterling to stabilise

The Bank of England has today elected to keep interest rates on hold at 5.00%, in what must have been one of the Bank's closest calls. With the outcome of today's meeting far from being fully priced into Sterling, currency specialists HiFX believe there should be room for the Pound to appreciate a little in the coming sessions.

Marc Cogliatti, Currency Strategist at HiFX comments: "The decision to keep rates on hold today falls in line with the recent pattern of a cut every other month since the first decision to reduce rates in December last year. The opportunity for Sterling to strengthen over the next couple of months will come as a welcome relief to UK importers who have had to contend with rising commodity prices (in particular record oil prices) as well as the recent weakness of Sterling.

"In light of huge increases in pipeline inflation and reports of rising prices in many sectors, the MPC have chosen to maintain a gradual approach to monetary easing, avoiding back-to-back cuts for fear of de-anchoring inflation expectations. Nevertheless, with risks to economy still focused on the downside, the market is still pricing in further cuts in the months ahead."

While consumer inflation remained steady at 2.5% y/y in March, pipeline inflation continues to pose significant upside risks. Input price inflation reached an all-time high in March of 20.6% y/y, driven largely by fresh rises in crude oil prices. Meanwhile it is becoming increasingly apparent that UK firms are no longer able to absorb such cost pressures, as output prices rose for a seventh consecutive month in March to 6.2% y/y.

Cogliatti continues: "Today's news comes despite reports that the UK economy is slowing as consumers look to tighten their belts and the MPC will be increasingly mindful of recent developments in UK financial markets and their implications on the housing sector and consumer confidence. In recent weeks, we've seen further signs of cooling in the housing market (mortgage approvals slumped to their lowest level on record in March) coupled with evidence from the CBI that activity on the high street is beginning to wane. The market will look towards the release of the Bank's quarterly inflation report next week and minutes from today's meeting in two weeks time to gauge how serious policymakers regard recent inflationary pressures."