Pound Continues Fall After Interest Rate Decision

The British pound has plunged following the Bank of England’s announcement that interest rates will remain at 0.5%.

Since noon yesterday, the pound has fallen from 1.54 to the US dollar, to 1.51 this morning.

 The decrease in comparison to the pound, may have been compounded by the prospect of an interest rate rise in the United States.

 Later today, the US Bureau for Labor Statistics is set to release the employment figures for October, and positive news may increase the temptation for a rate rise next month.

 Against the euro, the pound began to slip progressively yesterday afternoon. This has resulted in a fall from 1.425 to the euro, to 1.39 this morning.

Bank of England Monetary Policy Committee Strongly Favoured 0.5% Rate

At the end of its meeting yesterday afternoon the Monetary Policy Committee (MPC) of the Bank of England, voted 8-1 in favour of maintaining the current 0.5% interest rate.

The decision was made due to a combination of factors. In September, the Consumer Price Index (CPI) stood at -0.1%, more than 2% below the Bank of England’s ideal inflation rate.

The deflationary figure was arrived due to falls in prices mainly in energy, food, and various prices of imported goods.

Combined weakness of the imported prices, and domestic costs, have ensured that core inflation is anchored to the 1% mark.

Inflation Outlook

Following the decision to hold interest rates, the Bank of England concluded the main inflation factors, are a persistent balance over price drags from sterling and world export prices.

The outlook for global growth has now weakened the Bank of England said, since its August Inflation Report, increasing the necessity to keep interest  rates low.

The MPC has also downgraded their expectations of growth in the UK over the medium term.

And warned that even though there is likely to be broadened growth in advanced countries, there could be greater risks from abrupt slower growth from emerging economies.

Bank of England Pleased with Consumer Confidence

Consumer confidence the Bank of England believe is firm, with real income growth this year set to be the strongest since the 2008 financial crash.

This has resulted in solid domestic demand from UK consumers. The Bank of England admit that this growth has stalled recently, but are projecting a hike in growth in the middle of next year.

A tighter labour market and stronger productivity, are likely to facilitate an increase in spending and consumption.

Looser credit conditions are set to encourage strong investment, that could pickup the housing market.

Private Sector to Increase Activity

Demand from the private sector is set to rise next year, that should eliminate spare capacity in the market. The increase in wage growth compared to that of productivity growth is likely to result in domestic cost pressures.

CPI inflation is still expected to be below 1% until the second half of next year, due to the continuing drag from commodity and other imported goods prices.

Analysts Believe Interest Rate Decision Cautious

Most analysts reaction in the UK, agreed that there is currently a ‘dovish’ stance over interest rates by the MPC.

James Sproule, the chief economist at the Institute of Directors, said: “Caution won out again at the Bank of England today, with the MPC spooked by a worsening outlook for global growth.”

“But, with strong consumer confidence and wages on the up, the arguments against raising interest rates from the current exceptionally low level are falling away.”