Bank of England: no game-changer

As expected the Bank kept rates on hold, even though some in the markets were looking for a rate rise.

While today is a bit of a non-event and next week’s Inflation Report is the big deal, it does at least show that Mervyn King’s dovish stance still has some sway (although we’ll find out how much when the minutes of this meeting are released later this month.)

Sterling immediately dipped lower on the announcement, after all, there was a 20 per cent chance that the Bank would raise rates today. However, the pound is little changed a mere 30 minutes since the announcement.

3-month GBP swap rates have fallen quite sharply, while 2-year Gilt yields dipped lower before climbing again.

Overall, the price action suggests that the landscape hasn’t changed much and we really are none the wiser regarding the Bank’s trajectory for rate increases. The fact that two –year yields haven’t really moved suggest that the markets still expect a hike in the near-term – now that means March. Between now and the Inflation Report, GBPUSD is likely to remain volatile. Next Thursday will hopefully give more clarity to the outlook for UK interest rates as King will be able to give markets a steer on whether they have been expecting too much from the Bank or if they have hit the nail on the head and inflation concerns will trump growth fears.

Right now we are still deep in the fog of confusing economic and growth signals.

Source: FOREX.com

10.02.2011