The Bank of England (BOE) left its key interest rate as is today as well as monetary policy. However, the continuing strengthening of the British Pound (GBP) I causing the policy members a problem. It’s a major headache. Business leaders have warned that is the pound continues to strengthen it could choke the fragile recovery especially if the BOE raises rates.
The BOE held the key short rate at 0.5 percent, which is a record low, and have its asset purchases the same. It would seem, the bank is getting ready to take some action within the near future. We heard from Deputy Governor Minouche Shafik who said the BOE would be lowering its estimate for spare capacity, in the economy, for next month. This is fueling talk that the BOE is poised to raise rates within this current year. This would benefit the GBP with a higher yield. The GBP/USD opened at $1.655 then soared to $1.7118 in early trade today.
Even though a strong currency and a bullish economy is good news, as the U.K. returns to normal, it is not so good for businesses. They are complaining about rising price pressures and how that will be detrimental to their bottom line, especially for exporting companies who prefer a weak pound. This has given business leaders from the British Chamber of Commerce ammunition to ask the BOE to hold off raising rates. They argue, that a rate hike would be bad for their bottom line and take money out of the economy as consumers would have less money to spend.
An interest rate hike now would also drag the nation’s export recovery. As the cost for borrowing would rise which would make businesses hesitant to borrow and expand. This would also hurt the employment sector and its recovery. Even though businesses are becoming cranky over the strengthening Sterling, traders are positioning themselves for what they think is inevitable, they are buying the pound which is causing it to go up in value.
This is the view on the street, even though manufacturing production was a disappointment the overall feeling is that the British economy is on strong footing and the BOE will look at the whole picture and make a move sooner than later concerning interest rates and monetary policy. Therefore we expect the Sterling to do well. We expect the euro to fall to around €0.77 to €0.78 from where it is today at €0.7865 in the short term.