City expert: “BOE is treading a very fine economic line,” as they leave rates on hold at 0.5%

London - 4 March 2010

Bolsom says “recovery too fragile for them to exercise traditional methods of inflationary control”

For the twelfth month in a row the Bank of England left interest rates on hold today at 0.5 per cent and maintained their asset purchasing programme at £200 billion.

Mark Bolsom, Head of the UK Trading Desk at Travelex, the world’s largest non-bank FX Payments Specialist, commented, “We’re not surprised by this. I stand by my forecast that the Bank of England will keep rates at 0.5 per cent until the beginning of 2011 at least, as they will be wary that hiking rates too early would choke economic recovery. Keeping quantitative easing on hold is also entirely consistent with Governor King’s speech last week where he said they were still waiting to see the full impact of quantitative easing filter through.

“The Bank are treading a very fine economic line as recovery remains too fragile for them to exercise traditional methods of inflationary control. On the one hand, interest rates cannot be raised whilst credit conditions remain tight and a huge budget deficit exists. On the other hand, inflation has completely shot past the 2% target to 3.5%.”

Bolsom continues, “Potentially, all they can do is play a waiting game and let the government control inflation through fiscal policy, with spending cuts and higher taxes. The Bank will most probably assess the impact of the government’s fiscal response before they make their move - either to increase interest rates or extend quantitative easing.”

Sterling benefited from the news, moving 0.09% against the euro to €1.1022, and 0.19% to $1.5082 against the US dollar.

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