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Foreign Exchange

Interest rates: Rate jitters stalk market

Uncertainty worldwide on the next move in interest rates is leading to short-term volatility and price gyrations in the foreign exchange market.

Traders say that in some cases perceptions are seemingly changing on almost a daily basis, as central bankers struggle to balance the need to cut rates to stimulate growth with the need to increase them to combat inflationary pressures.

For instance, the consensus view that UK rates would fall further to counteract the risk of a damaging fall in the housing market was challenged with the release of minutes from the Bank of England’s monetary policy committee’s meeting on April 23. The minutes showed that although the MPC had then decided to cut interest rates by 25 basis points to 5%, the nine-strong committee was split three ways: two members, Tim Besley and Andrew Sentance, voted to keep the BoE’s key repo rate on hold, while one member, David Blanchflower, voted for a larger, 50bp cut.

According to Matt Sharratt, European economist at Bank of America in London, the decision reaffirmed "the BoE’s apparent reluctance to engage in rapid rate easing given concerns about the near-term inflationary pressures".

Sharratt adds: "The BoE minutes recorded that there was a split between those believing that the downside CPI risks in the medium term had risen in light of the deteriorating economic climate and those that were ‘less clear, but on the basis of the central outlook, thought it was nevertheless appropriate to implement some of the further easing that was implied by the February inflation report projections.’"