The pound fell again against all 16 of the most actively traded currencies in the markets yesterday after the Bank of England (BoE) voted for the fourth straight month in a row 6 to 3 in favour of maintaining interest rates at the historically low level of 0.5% minutes of the Monetary Policy Committee (MPC) meeting held on 4 and 5 May showed. Meanwhile, 8 out of the 9 members voted to maintain the stock of asset purchases at £200 billion. This confirmed the suspicion amongst many in the markets that the MPC remains deeply divided on policy and thus, we are unlikely to see any increase in UK interest rates before the end of the year.
This leaves the pound vulnerable as during times of risk appetite, investors flock to higher yielding currencies like the Australian, New Zealand and Canadian dollars and even the euro (where interest rates are now 1.25% and likely to rise again in the summer after the publication this week of inflation data showing prices in the euro zone have hit a 30 month high) but equally vulnerable during times of crisis when risk aversion reigns as investors then seek comfort in currencies of countries with low debt like the Swiss Franc and Norwegian Krone.
International Monetary Fund chief Dominique Strauss-Kahn bowed to the inevitable yesterday and resigned following allegations he sexually assaulted a hotel maid in New York. In a statement, Mr. Strauss-Kahn, 62, said he had already informed the executive board of his intention to step down “with immediate effect”. He again firmly denied the criminal charges against him.
He was due this week to be at a vital EU finance ministers meeting where the EU unanimously approved a €78 billion bailout of Portugal. A review of last year’s bail outs of Greece and Ireland continues.
The US Federal Reserve has said the US economy is recovering moderately, newly released minutes of its April policy committee meeting show. The Fed’s policy makers discussed “normalising” monetary policy but committee members agreed to keep interest rates unchanged at between zero and 0.25% and voted to continue with the bank’s $600 billion Treasury bond purchase plan until the end of June. The programme is the Fed’s second round of “quantitative easing”, dubbed QE2.
Although they discussed raising interest rates, they stopped short of making any decisions and said exceptionally low interest rate levels would be warranted “for an extended period”. Some members of the board said the recent rise in inflation had been fuelled by significant energy price rises and other commodity prices.
Japan’s economy, the world’s third largest, has slid back into recession after the devastation caused by the earthquake and tsunami in March. Japanese gross domestic product (GDP) shrank 0.9% in the first three months of the year, the Cabinet office said, giving an annualised rate of contraction of 3.7%. Analysts say consumption and exports were worst hit.
The contraction in the first three months of this year was bigger than expected, with most analysts expecting the annualised rate would show a contraction of about 2%.
“Japan’s economy is expected to remain weak for the time being,” said Japanese Economics Minister Kaoru Yosano on Thursday.
Commentary by Tony Redondo
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