BoE rate decision eagerly awaited

Today (5 November) at midday the MPC will announce its decision on interest rates and quantitative easing. Interest rates are almost certain to remain on hold at 0.5% with the decision on QE to take the spotlight. As today has drawn closer the expectation has escalated that the Bank of England will expand, the question is, if it does, by how much? The argument is that if it is going to expand then why not do £50 billion rather than £25 billion?

The reasons for expanding are very apparent; the recent dire GDP number, rising unemployment, dire public finances and banks that are still not passing on this increased liquidity. On the other hand, most major economies are now looking at exit strategies from unconventional measures and there is a danger that over-cooking QE could stoke inflation and lead to an inflationary problem and sharp interest rate increases to combat this. At the same time there are whispers that the Q3 GDP will be revised upwards and that Q$ GDP will show an exit from recession and a slow recovery for the UK. So the arguments and the significance of today’s decision are evident, the BoE is walking a fine tightrope and it does not want to topple either way and obviously stay on track in controlling inflation.

The implications for the currency markets today are high – volatility will be severe with the decision at midday followed by the European Central Bank decision at 12:45. If QE is expanded then this should lead to a Sterling sell-off, if it is not then we could see a Sterling rally. The ECB are not likely to throw in any surprises today holding rates at 1% and giving little away in relation to monetary policy measures.

Last night the Federal Reserve maintained its rates and offered up no surprises with the statement to maintain "exceptionally low levels for an extended period". It was slightly more optimistic than previously but nothing close to hawkish. The reaction therefore was to sell USD and an initial surge pushed GBP/USD towards 1.66 and EUR/USD towards 1.49 before fading in later trading. One eye would have been on today’s central bank decision suppressing the appetite of the dollar sellers. Hold on to your hats today!

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