Currency watch: MPC holds the cards

The Bank of England’s inflation report on Wednesday morning has dominated UK rate watchers this week as we try and work out where the interest rates rise will come.

Of course, there is a limit to the shock factor of the inflation figures as the Monetary Policy Committee (MPC) would have had a glimpse at them and still decided not to raise rates in its February meeting.

What we assumed in last week’s column – that the combination of VAT, oil and food price rises, will push CPI inflation up to the 4.0% mark from where it currently rests at 3.7% – came true.

It seems likely that the MPC will use the inflation figure to keep the door open to the possibility of raised rates within the next few months, even if they do not decide to do so.  
 
It would make sense that the MPC would want to be certain of the Q4 slowdown being a blot on an otherwise positive copy book. The threat of a rate rise is not going to go away quickly, the committee will do what it can to avoid putting them up but if the pressure intensifies too much come the middle of this year it might not have a choice.
 
“Sterling has caught a bid on these feelings with it moving to four-week-highs against the euro and two-week-peaks against the dollar and the general tone of the Bank’s release fits in nicely with our appraisal that GBP will head higher over the course of 2011.

Risks do remain and members of the drinks industry are more than able to tell me of the uncertainty in the Eurozone; something that could have a real effect on British business should the worst fears be realised.

Jeremy Cook, chief economist at World First foreign exchange, 18.02.2011