The pound continued to fall against the Euro yesterday as most analysts now believe that UK interest rates will be held unchanged at 0.5% at today’s meeting of the Bank of England’s Monetary Policy Committee (MPC). The MPC has been under pressure to consider raising rates from the current historic low to rein back inflation. It would be the first such increase since 2007. However, data showing a surprise 0.5% contraction in UK GDP during the last three months of 2010 appeared to make an imminent rate rise less likely amid fears it would stifle a recovery.
The Consumer Prices Index (CPI) measure of inflation has exceeded the Bank’s 2% target by more than 1% for more than a year and rose to 3.7% in December.
The British Retail Consortium (BRC) urged the MPC to hold its nerve, warning that a rise could damage the economic recovery.
“The monetary policy committee (MPC) is currently negotiating a tortuous path between high and rising CPI on one side and faltering economic activity and serious growth headwinds on the other,” said Howard Archer, chief economist at IHS Global Insight.
Data out yesterday showed that higher imports pushed the UK’s visible trade deficit to £9.2 billion in December. The deficit with the EU was barely changed but it increased against the rest of the world. Higher commodity prices are part of the reason for the rise in the value of imports. The final figure was much higher than the £8.6 billion deficit that had been forecast. The growth in exports was much more modest than that of imports and export volumes fell during the month.
In the US, Fed chairman Bernanke’s comments yesterday afternoon about the weakness of the US economy and the continued risks to it of high unemployment undermined the US dollar.
Despite its recent gains against the pound, the euro dipped for a second day running against the US dollar after reports that German Bundesbank President Axel Weber would not stand for the position of head of the European Central Bank (ECB) after Jean-Claude Trichet steps down later this year.
The pound remains at an 11 month high against the South African Rand (ZAR) as the rally in gold prices falters and market sentiment remains volatile.
Commentary by Tony Redondo
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