Foreign exchange markets pick up the pound sterling once more as fears of a further interest rate cut at Bank of England subside

Details

Published on Wednesday, 08 August 2012 10:58

Written by Sam Coventry

International Money Transfers at our sister site

"If we look at the market interest rate chart, it now looks to price in a rate cut in the fourth quarter of this year" - Tom Vosa at National Australia Bank.

It was Governor Mervyn King at the Bank of England who provided a much-needed boost to the pound sterling (Currency:GBP) in late morning trade in London.

The pound Australian dollar exchange rate is 0.14 pct higher at 1.4816.
 
The pound euro exchange rate has surged by 0.56 pct to 1.2671.

The pound dollar exchange rate is 0.26 pct higher at 1.5662.


King has essentially poured cool water on speculation that a cut to the base interest rate at the BoE is due before the year is out. The threat of such a cut has continually undermined the strength of sterling over the past couple of weeks.

King told reporters:

"We have not cut the Bank Rate [from record low of 0.5pc] because it would be counter-productive and hurt building society sector. But a quarter-point change of Bank Rate is not going to be the difference between recovery and non-recovery."

James Knightley at ING says:

"Interestingly, King appears to rule out a rate cut, which some analysts have been anticipating.

"There are ongoing debates about the amount of spare capacity in the UK, but based on our forecasts for GDP growth, it will be 2014 by the time the UK gets back to its previous peak in terms of real economic activity. Furthermore the UK economy will be 13.5 percent smaller than it would have been if it had continued growing at its pre-crisis trend through 2014.

"This suggests to us that inflation pressures will remain benign, allowing the BoE to expand QE (quantitative easing) further. However, given that they only embarked on a new round in July and with the Funding for Lending Scheme only just having got going, we doubt it will happen before the November monetary policy meeting."

However, some are predating a rate cut is on the cards. Tom Vosa at National Australia Bank says:

"If we look at the market interest rate chart, it now looks to price in a rate cut in the fourth quarter of this year, rates remaining at a quarter of one percent until the second quarter of 2015."