Policy maker Andrew Weale decided today to join Andrew Sentence in calling for a quarter point rise in interest rates as officials start to accept that risks to inflation have moved upwards. The BoE minutes stated that most members accept that recent developments have shown that inflation risks in the medium term have augmented.

Credit Suisse’s overnight index swaps have indicated that a rise in interest rates by 50 basis points is likely this year, the markets were looking today at the minutes for insight as to when rates might move and if they will move by more than expected. The release today however indicates that a rate hike in the immediate future seems unlikely, MPC members noted that a slight increase would leave monetary policy in an accommodative position, yet would most likely be misinterpreted by the markets causing feeling that they may be about to undertake more aggressive rate hikes to tackle the current inflation problem.

The annual inflation rate hit 3.7% in December and has remained above the Bank of Englands inflation rate for more than a year. BoE governer Mervyn King yesterday forecast the rate to continue upwards due to higher commodity prices and the VAT increase. The MPC does however think that inflation will fall back below the 2% targert once the impact from the VAT hike and commodity prices becomes absorbed by the markets.

The Bank of England have tried to dismiss the shocking Q4 GDP figures released yesterday, stating bad weather as the primary cause. Traders don’t really seem to believe that negative growth seen over 3 months can be attributed to patches of snow over the 3 month period. The outlook for the pound looks poor despite the Bank of England maintaining that we are likely to see ongoing steady growth.

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Best Regards
Luke Zorab

Torfx Currency Dealer

“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.”