Currency markets have consolidated today ahead of the Bank of England’s rate announcement tomorrow at 1200. Markets have scaled back expectations of any imminent increase in rates and expect monetary policy to continue on its current track at least until May. Some more extreme views from analysts at HSBC have put forward a case for no change in rates for the entirety of 2011.

Analysts at HSBC argue that with the current state of the UK economy and expected anaemic growth this year, the BoE will be forced to keep interest rates low to keep the economy on a forward path. This argument is not however shared by all economists and Credit Suisse still be believe that we will see two incremental rises this year.

The argument for interest rate hikes, is of course elevated inflation levels and the ongoing expectation that price pressures will rise in the UK economy. Inflation has historically been a fundamental problem when the UK economy has exited recessions of the past and will probably be a problem this year or next. The current belief is that despite elevated inflation levels, any increase in interest rates could harm a UK economic recovery through higher borrowing costs and less investment as a result of better savings rates.

The Bank of England does not want to be seen as inflation complacent and will hope that price pressures calm on their own accord. It is therefore unlikely that we will see a change in UK interest rates at least until May.

UK CPI and RPI are due next Tuesday and will be the next piece of the inflation jig saw. These figures are key and will be the main driving force for the pounds direction in the coming week.

If you have a currency requirement and have any questions or queries please don’t hesitate to contact me.

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.”