Falling Sterling forces MPC to leave rates on hold

As expected, the falling strength of sterling has caused the Bank of England to leave interest rates on hold at 5.0% for the fifth consecutive month.

Marc Cogliatti, Currency Strategist at HiFX explains, "Sterling has been particularly weak in the build up to today's interest rate announcement reflecting gloomy growth forecasts from the OECD and, pertinently, from the UK's Chancellor, Alistair Darling. The Pound fell yesterday to its lowest level since April 2006 (1.7669) against the US Dollar and the Sterling index, which measures Sterling against a trade weighted basket of currencies, fell to a 12 year low at 88.20. Any prospect of the MPC being able to cut rates was buried by this sharp fall"

Falling Sterling has raised prices for the UK's importers, thus prolonging the inflation pressures in the economy. Cogliatti continues, "There is little doubt that the majority of the MPC are keen to begin cutting rates but only once the headline CPI rate shows some signs of peaking. Rising import prices will temper any enthusiasm for this course of action despite the recent decline in the oil price."

The lack of a rate cut often helps a currency. However, with negative sentiment on Sterling emanating from the poor UK growth prospects, HiFX believe that Sterling will only recover some of the lost ground against the Dollar when the MPC do start cutting rates.

The European Central Bank also conformed to market expectations and held interest rates steady today at 4.25%, maintaining their tough stance against inflation, despite the deteriorating growth outlook. Economic data over the last month has confirmed a hit to the Eurozone economy, which contracted in the second quarter for the first time since the launch of the Euro in 1999. Against this back-drop, the September projections are tending towards a downward revision for GDP growth for both 2008 and 2009.