Interest Rate Rise Discussions

Yesterday's Bank of England monetary policy committee (MPC) minutes threw up a surprise as another member voted for a hike in interest rates. Martin Weale joined long-time advocate Andrew Sentance in calling for a rise in interest rates with other members apparently very close to the same decision.

The minutes came after a far more 'dovish' (a dove is in favour of low interest rates) speech by Bank of England Governor, Mervyn King, on Tuesday and makes little sense when looking at the UK's economic performance. The votes were cast however prior to the dreadful UK GDP figures this week; we doubt votes be as finely balanced if members knew what the first estimate of Q4 GDP had in store.

Many economists believe that the Bank of England needs to take a firm line with domestically generated inflation, a theme echoed by the Governor, but in reality what inflation in the UK is currently domestically generated? There is little wage inflation, unemployment is rising and profit margins are being squeezed.

It meant Sterling had a better day yesterday (it couldn't have got much worse from Tuesday) amid the speculation that the Bank of England is shifting towards a tightening bias. It bounced back against the US Dollar and Euro and held steady against the Aussie Dollar. In fact, Sterling was up against 14 of the 16 most traded currencies for foreign exchange brokers yesterday.

There is not much data due for release today, so the markets are likely to focus on previous trends to see if they can extend them.