Analysts had suggested there was a 1 in 4 chance of an interest rate rise in the UK yesterday morning. In the end, it was another non event with The Bank of England keeping interest rates on hold at a record low of 0.5% and the Quantitative Easing (QE) grogram unchanged at £200 billion for at least another month although it will be a few weeks until we find out just how close the voting was. The 9 member Monetary Policy Committee (MPC) voted 7-2 in favour of keeping interest rates unchanged at their January meeting but Martin Weale joined perennial hawk Andrew Sentance in calling for a 0.25% hike to combat the rising threat from inflation. The cost of living in the UK, as measured by the governments favoured CPI index, is currently running at 3.7%, almost twice the 2% target and the CBI predicts it will average 4.2% during the first quarter of this year.
CBI chief economic adviser, Ian McCafferty, thinks the Bank will need to start putting up interest rates from the second quarter of 2011. Others are not so sure. Barclays points to the UK economy’s contraction in the fourth quarter of 2010, “uncertainty about the impact of the government’s fiscal consolidation plans and the general (though not complete) lack of MPC speakers preparing the ground make tighter policy now unlikely.”
Confidence in the euro was knocked as Portuguese borrowing costs rose to a euro era high of 7.6% before the European Central Bank (ECB) intervened to buy Portuguese bonds. A rise in borrowing costs to 7% was the trigger that saw bailouts in 2010 for both Greece and Ireland. The decision by Bundesbank President Axel Weber to step down after he pulled out of the running to succeed ECB President Jean Claude Trichet also knocked the euro. Webber had been seen as the hot favourite to succeed Trichet when his second term of office expires later on this year.
Yesterday’s surprise fall in the US weekly jobless numbers to their lowest levels since July 2008 saw the US dollar rally as this generated optimism in the US economic recovery.
President Mubarak of Egypt decision not to stand down after he had been widely expected to do so increased tension in the region. This also aided the rise in the US dollar as it is seen as a safe haven during times of strife.
An increase in risk aversion after the political tensions in Egypt and on the Thailand/Vietnam border and an increase in Chinese interest rates has seen a sell off in both the equity and commodity markets allowing the pound to retrace against the high yielding currencies.
It is now at a new 11 month high against the South African rand; a 2 month high against the New Zealand dollar and a 2 week high against the Australian dollar.
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
