UK Interest Rate Expectations Falter
The Pound has suffered today retracing off highs off 1.6160 vs the dollar and 1.1876 vs the Euro. Momentum has shifted towards the downside despite the British Retail Consortium reporting a jump in sales in the UK in January. The RICS house price balance also reported the strongest reading since July indicating a stabilisation in the UK housing sector.
The Sterling decline can be attributed to the announcement that a new tax will be levied upon the UK banking sector. The introduction of this tax by Chancellor of the Exchequor George Osbourne, helps emphasise the governmentâ€™s aim of quickly reigning in the UKâ€™s large budget deficit. The tax aims to raise an extra Â£800 million from the now mostly recovered UK banking sector.
Interest rate expectations have also been scaled back as investors lower expectations of a rate hike on Thursday from 20% to 15%. Recent Sterling buoyancy is largely due to heightened interest rate expectations and it would seem that the majority of economists believe that the Bank or England will continue with their wait and see approach until May.
HSBC analysts have surprised the market by today announcing that they think the Bank of England wonâ€™t raise interest rates until Q1 of 2012. If on the release of the minutes later this month there is any hint of no tightening in monetary policy this year we could see the pounds recent gains rapidly reverse.
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