BoE Interest Rate Ddecision

By: Submissions

Gareth Talbot submits: Following today’s Bank of England interest rate decision Phil McHugh, senior analyst at foreign exchange firm Currencies Direct, said:

“The pound fell to a one week low against the euro in the run up to the BoE rate decision although remained steady on the announcement.  The decision as expected was to maintain rates at 0.5% and to hold fire on the asset purchasing programme.

“Further QE would send a message to the markets that all is not well and the Bank has kept its cards close to its chest in order to manage expectations and avoid spooking the markets as recent UK economic data has been tentatively positive. 

“In addition potential economic shocks such as a worsening of the Eurozone sovereign crisis or further slowing in global growth driving emerging economies such as China and Brazil will trigger further QE medicine.  The immediate threat is a lack of success in the Greek bond swap deal – it is still unclear whether the Greeks will muster the required participation rate for the swap before tonight’s deadline.

“As we pass the three year anniversary of 0.5% interest rates and the introduction of QE it is important to reflect upon the impact of what was introduced as an emergency and temporary measure. Sterling has underperformed against the higher yielding, commodity based currencies over the past three years.

“For example, the pound is over 15% weaker against the South African Rand and over 30% down against the Australian Dollar since March 2009. Ultra-low rates and QE made it a one way bet that emerging market and commodity currencies would appreciate against the pound as their currencies strengthen in a non-stimulus environment.

“QE was expected to encourage consumers and business to maintain spending and borrowing via the banks by holding down medium and long-term interest rates. However, what actually happened was consumers and businesses began to pay down debt and scaled back investment.  A weaker pound has not yet led to a significant increase in manufacturing output and investment. 

“It seems the Bank’s medicine is not working as effectively as they would like and I expect the cocktail of low interest rates, further QE and a weaker pound to remain very much on the Bank of England’s agenda. We could see a further £25bn of QE as early as May if inflation falls as expected, much to the concern of markets.”

Phil McHugh
Currencies Direct

© 2012 Copyright Phil McHugh- All Rights Reserved

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