ECB raises rates but expert says UK unlikely to follow suit until June

London - 7 April 2011

For the first time in almost three years the ECB has increased interest rates from a record low of 1% to 1.25%, signaling an end to its loose monetary policy. The euro rose against the pound to 1.1404 on the back of the news.

Mark Bolsom, Head of the UK Trading Desk at Travelex Global Business Payments comments, “There has already been much market speculation that the ECB would raise rates, and the 0.25% rise came in as forecast.

“In terms of what this means for the UK, economic data released yesterday confirms the view that the UK economic recovery is too fragile to withstand a tighter monetary policy. It would be far too premature for the Bank of England to raise rates now, against the current backdrop of government spending cuts and higher taxes. With that in mind, I believe that UK interest rates are unlikely to rise until mid-2011, as the Bank comes under pressure to curb rising inflation. And even then, I think they will only raise it by a quarter percent.

“Either way, the change in interest rate differential will keep sterling under pressure against the euro, as investors will see little reason to hold onto the pound. This will be welcome news to British exporters, as a weak pound ensures that their exports remain competitive overseas.”

Poll reveals that June is the most likely month for a UK rate hike

Research conducted by Travelex Global Business Payments shows that most UK consumers expect a rate hike in June (15%), whilst 8% believe that the Bank of England will raise rates as early as next month. However, whilst a rise in interest rates may help to stabilise record-high inflation levels, Travelex Global Business Payments warns that a rate hike could have a negative impact on British exporters, if the pound strengthens following the hike.

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