Bank of England vote 6-3 to keep rates
The UK CPI Inflation figure, yesterday, came in above market expectations of 4.2% at 4.5%. This led to Sterling strength in the immediate aftermath of the release, this reaction, however, proved to be temporary with Sterling dropping back below the levels seen before the announcement against both the Euro and the USD. The reason for this weakening is that the majority of this rise has been put down to the temporary effects of a late Easter and the Royal wedding, with, transport prices rising 10% and Air prices rising 29%, therefore, it is questionable how much these figures increase the pressure on the MPC to raise rates, as, much of this increase in inflation should be partly reversed in May. The other reason for the muted reaction to the announcement is that the MPC has given itself, considerable breathing space by stating that it expects inflation to reach 5% at some point this year.
The German ZEW survey for current conditions reached a record high, however, the expectation index fell for the third month in a row. It is therefore likely that solid growth will continue in the German economy, albeit, at a slower pace than the 1.5% GDP seen in Q1.
Meanwhile, data from the US was less encouraging as U.S housing starts and building permits fell in April, and are expected to remain at record lows for an extended period due to the amount of excess housing currently available. Also Industrial production disappointed in April coming in flat against expectations of a 0.4% rise.
The other major data releases today are the unemployment figures for the UK which are expected to remain steady and the FOMC minutes which should give an indication of the possibility of any further QE.
BoE decision to maintain the Bank Rate at the current 0.5% was approved by 6 votes against three, according to the Bank’s Monetary policy meetings, with Weale and Dale voting for a 0.25% rate hike, and traditional hawk Andrew Sentance in favour of a 50 b.p. rate hike.
Furthermore, UK unemployment fell by 77,000 in the three months to March, the largest decline since the second quarter of 2010. The Unemployment level declined to 7.7%, from 7.8%.
The Euro appears to have regained some of its strength due to the continually strong data from the German economy, refocusing attention on interest rate differentials. However, the Greek debt problem remains unresolved, and, there appears to be a difference in opinion between European finance ministers on how the debt should be dealt with as the French remain unconvinced by the current pace of privatisation of the Greek economy.