Bank of England to Decide on Rates

With the Bank of England meeting later Governor Mervyn King may oversee another stalemate today as faster inflation and conflicting economic signals continue the trend of a three-way split on his Monetary Policy Committee over the need for more stimulus.
The nine-member panel will probably keep the size of its bond-purchase plan at 200 billion pounds ($314 billion), according to all of the 34 economists in a Bloomberg News survey. All 58 economists in a separate poll predicted the benchmark interest rate will stay at 0.5 percent. The bank announces the outcome of its meeting at noon today in London.

Bank of England need to weigh up and consider whether Britain faces a greater danger from inflation or from the deepest budget cuts since World War II and Europe’s debt crisis. Policy maker Andrew Sentance voted last month to withdraw stimulus, while Adam Posen argued the economic recovery needs more aid, and the rest opted for no change.

There may be an uneasy truce as some policy makers think that things will slow down, it may not be enough to tip the hands of other policy makers. The euro crisis may allow the UK to take a back seat and consolidate over the next few months and any further stimulus it is thought won’t be considered until late 2011, by which time the Bank of England may well have started at looking at increasing interest rates.
The pound was little changed against the dollar today, trading at $1.5802 in early trading today. The yield on the 10-year U.K. government bond slipped 3 basis points to 3.519 percent

Sterling should take comfort in the fact that we have had a succession of good news about the UK economy this week, although it has lost some of yesterday morning’s good gains versus the euro falling to 1.1886 from 1.1967. Following on from Tuesday’s better than expected manufacturing report for October, the December CBI industrial trends survey showed orders at their highest level in more that two years.

Buyers of New Zealand and Australian Dollars will know that the picture has been particularly gloomy over the last 6 months or so but there may have been a glimmer of light with the statement of the reserve Bank of New Zealand being particularly dovish as it left rates on hold at 3%. This lead to the GBP-NZD price moving from around $.05 on Monday to $2.12 overnight. The Aus Dollar also weakened on the news. Be thankful for small blessings.

The US Dollars recent rally appears to have run out of steam, in tandem with a pause in the sharp uptrend in the US Treasury yields, which had been a major driver of dollar gains earlier this week. A view is emerging that the sell off in treasuries, on raised growth expectations after the deal struck between President Obama and Republicans to extend tax cuts, may have been over done.