Expectations of Monetary Policy Meeting at the BoE

Daily Forex Fundamentals | Written by Jyske Bank | Aug 06 08 10:11 GMT |

JB expectations: unchanged interest rates

Market expectations: unchanged interest rates

In favour of unchanged interest rates:

* the housing market is struggling
* economic growth is slowing
* the BoE has accepted temporary high inflation

In favour of an interest-rate hike:

* consumer confidence at its highest level since 1992
* prospects that inflation rises further

In line with market participants, we expect the Bank of England (BoE) to hold interest rates at the current 5%. The dilemma of rising inflation and slower growth is unchanged.

It is notably the high food and energy prices that push up inflation. The last minutes from the BoE revealed that the BoE expects inflation to rise further than expected in the inflation report from May and even higher than expected when Mervyn King sent a letter to the Chancellor of the Exchequer to account for the high rate of inflation. We expect unchanged interest rates until the turn of the year when a more bleak growth picture emerges and the inflation prospects are less tough. If interest rates are left unchanged, the interest-rate decision is often not followed by any comments so the details from the meeting will not be revealed until the inflation report on 13 August and the minutes on 20 August.

The market moderated its expectations of the interest-rate path in the UK over the past 30 days. From unchanged interest rates of 5% over the next twelve months to currently discounting an interest-rate cut of at least 0.25 percentage point in mid-2009. Jyske Bank's expectations and the market's expectations are now closer to each other. There is a minor difference in the timing of the first interest-rate cut. We expect that it will come before the turn of the year whereas the market expects it to come right after the turn of the year.

Since late March, the sterling has been caught in range trading and even though there is still a bad news flow out of the UK, it has not had a major effect on the currency. The sterling has been trading between 78 and 80 against EUR and between 932 and 956 against DKK. In view of accounts from the ailing financial sector in the UK, unchanged interest rates, a housing market which appears to have no bottom and generally slower economic growth, we assess that the risk for the sterling is still to the downside.
FACTS

Date: 7 August

Interest-rate announcement: 1 p.m.


Jyske Markets - FX Research
http://www.jyskebank.dk/finansnyt