Sterling rallies after Bank of England stay on hold

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Sterling rallies after Bank of England stay on hold………
By Andy Scott, premier account manager at foreign currency exchange brokers HiFX:

“Sterling made broad gains on Thursday following the monthly rate setting meeting by the Bank of England where they voted to keep interest rates on hold at 0.5% and not to increase the quantitative easing programme. The Pound rose by around 0.5% against both the Euro and the US Dollar following the announcement which was a very close call with the number for forecasters predicting them to leave policy unchanged at six, versus four voting for an increase of £25bn.

“Despite Mervyn King and two other members voting in favour of an increase of £25bn in the asset purchase programme last month, they failed to convince enough of the rest of the monetary policy committee that such a move was necessary. With King coming to the end of his tenure in June, it could be that he has lost some credibility within the monetary policy as previously when he’d been out voted at one meeting, he achieved a majority at the following meeting.

“I suspect one of the key reasons the majority also didn’t vote for an increase is due to the fall in Sterling of around 7% against its major counterparts this year. Whilst a lot has been made of the potential positive impact a weaker currency can have on exports, we’ve also seen the impact that can have on inflation due to imports such as oil and gas which are priced in US Dollars. In 2011, inflation was running at around 4.5% year on year, hitting a 3-year high of 5.2% when the economy was barely growing. This proved to be a massive drag on consumers spending power as energy costs soared and wages failed to keep up with price rises leaving the majority of households worse off. With a number of major investors and hedge funds still betting against Sterling, perhaps they’re currently more concerned about the risk of additional Q.E. being greater than the reward.“