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MPC minutes fail to quash double dip fears

21 July 2010

Minutes released this morning from the Monetary Policy Committee's last meeting, showed that members voted 7-1 in favour of keeping Britain's interest rate at its current low of 0.5%.

For the second consecutive month, the only member of the committee to vote for a rise in rate of 0.25% was Andrew Sentence. This decision shows that although the committee believes the nation has pulled out of recession, the 'double dip' scenario still looms overhead. Market reaction to the data has been relatively muted, leaving sterling largely unaffected.

Tom Hampton, currency analyst at Caxton FX says:

"With the UK's inflation rate well above that of the US and the EU, Andrew Sentence will feel justified going against the grain in calling for an interest rate rise of 0.25%. However, with the heavy austerity package still to take effect on the economy, a rise in interest rates now could put too much downward pressure on the already fragile recovery"

"There is still a large upside for the pound. Sterling could be looking to enjoy a period of unimpeded growth against most currencies until December with high levels of inflation and the possibility of an interest rate rise before the end of the year, to help bring inflation down to the targeted 2% from its current rate of 3.2%. This reiterates our view that sterling will hit 1.22 Euros by mid August, with a view to rise to 1.27 Euros by the end of the year," continues Hampton.

Having hit an intra-day low of 1.1798 Euros early in the session, sterling has enjoyed a rise to 1.1902 Euros, following the euro's artificial inflation earlier in the week. Against the dollar, sterling opened low at 1.5261 and is trading within a range at 1.5270.

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