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Currency watch: Prepare for the five-pound pint

The past week has seen economists champing at the bit to get hold of the details of the upcoming Bank of England and European Central Bank interest rate decisions.

Unfortunately this column was written too early for the decisions to be known and so next week’s Currency Watch will contain more information about the intimate details.
At March’s Bank of England meeting the rate was held at 0.5% which marked it out as a record two years left unchanged, and even though the vote came in at six to three for a rate hold, the increasing level of inflation may change that soon.

In February the figure rose from 4% to above the expected 4.2%, coming in at 4.4% and the latest inflation report in February suggested that a pull to 5% is not impossible. Everyone needs to get prepared for the £1.50 litre of petrol and the £5 pint.
Sterling has unfortunately weakened after initially starting the year strongly and the reticence on the Bank of England to dive straight in to rate rises has caused this. The Monetary Policy Committee seems to be happy to let inflation rise and instead wait for further indications as to the strength of the underlying recovery in the UK.
All movement in the currency markets at the moment is as a result of interest rate differentials, ie the gap in interest rates between two differing currencies.

We have heard in the past few weeks noises from both the European Central Bank and the Federal Reserve that suggest members of both of their rate-setting committees are contemplating interest rate increases to contain inflation or remove some of the extraordinary stimulus that has held their respective economies up.
Jeremy Cook, chief economist at World First foreign exchange, 08.04.2011

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