Expectations of Monetary-Policy Meeting at the BoE

JB expectations: unchanged interest rates at 5%

Market expectations: unchanged interest rates

The BoE is facing a difficult dilemma of markedly falling growth and steeply rising inflation:

In favour of unchanged interest rates:

• inflation rises markedly - mainly driven by steeply rising food and energy prices

In favour of an interest-rate cut:

• economic growth is slowing in earnest
• the turmoil in the financial market continues
• continued uncertainty about global growth prospects

The BoE holds interest rates

We do not expect the Bank of England to follow the example of the ECB and raise interest rates to dampen inflation since most indicators point to that the British economy will continue to face difficult times and that there are no signs of rising wages. Like the BoE, we assess that there is reason to believe that the high rate of inflation is temporary, and we therefore expect the BoE to hold interest rates at 5% at this week's monetary policy meeting which in itself seems restrictive in the current growth scenario.

In fact, we expect the BoE to hold interest rates at the current level until the end of the year when a bleaker growth picture and lower inflationary pressure will leave room for cuts. We thus expect the BoE to cut interest rates twice by a quarter point in November and February, respectively, cf. the chart below.

No movements in market rates expected

The past weeks and months have been turbulent for British interest rates. During the spring, interest rates rose markedly as the inflation fear caught the market, and all expectations of rate cuts disappeared, cf. the chart below. If things proceed as expected, there is no reason to expect sharp market movements in wake of the interest-rate announcement on Thursday.

Especially not when considering that the BoE rarely comments on the interest-rate decision following the announcement. I.e., we have to await the release of the minutes on 23 July to better know the reason behind the BoE's move.

GBP caught in range trading

EUR/GBP has for several months been caught in an increasingly narrow trading range. For the longer term, we still expect the financial and macroeconomic factors to lead to further GBP weakening. However, for the short term it is difficult to see what it takes to prise the sterling out of the deadlock. We therefore maintain our expectation that EUR/GBP will trade in the 78.15-80.90 range for the short term.

FACTS

Date: 9-10 July 2008

Announcement: Thursday, 10 July, 1 p.m.

Jyske Markets - FX Research
http://www.jyskebank.dk/finansnyt

The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice. The analysis is for personal use of Jyske Bank's customers and may not be copied.