BoE maintains status quo

LONDON -- The Bank of England’s monetary policy committee (MPC) left UK interest rates on hold last week, despite more bad news concerning UK manufacturing.

But the decision to hold rates at 5% was widely expected by analysts, and there was little reaction to the decision in the currency markets.

The bank is likely to keep rates on hold at least in the near term, as domestic demand remains robust in the UK and it may be reluctant to over-stimulate that area of the economy, said analysts.

"A lot of domestic consumption data has been quite firm, and there is no sign that UK consumers are feeling the global slowdown," Will Rugg, senior currency analyst at Standard & Poor’s MMS in London, told FX Week. "I think we will see one more 25 basis point cut in November, and that will be it for the current easing cycle."

Although the UK’s shoppers appear oblivious to the threats posed by global economic slowdown, the manufacturing sector remains in dire straits.

Data from the National Statistics Office last week showed that UK manufacturing output slowed by 0.9% in July, giving a year-on-year slowdown of 3%. The numbers represent the worst performance since the UK’s last recession in the early 1990s.

The sector was dragged down by continuing slowdown in the telecommunications and IT sectors.

Industry leaders criticised the MPC’s inaction, saying a cut would have provided much-needed assistance to the sagging sector without impacting on the bank’s inflation target of 2.5%. They also warned that the slowdown affecting manufacturing might now spread to other sectors in the economy.

However, manufacturing accounts for just 20% of the UK economy, and analysts told FX Week that although a cut would be of help, the bank would not risk fuelling inflation. A Confederation of British Industry survey last week showed that retail sales growth hit its highest growth for five years, while other data showed that house price inflation hit double figures.

Sterling, meanwhile, continues to trade on an upbeat note. Although the US dollar’s bearish turn is now correcting, the UK currency has remained relatively immune to the move.

"Now the dollar has started to correct itself, cable has held up much better than the euro and Swissie," MMS’s Rugg told FX Week. "A lot of the big bets on UK convergence with the euro-zone that were put in the aftermath of the landslide Labour election victory are now being unwound."

Traders echoed those sentiments, pointing to widespread euro/sterling sales.