Thursday March 10, 2005 - 12:03:14 GMT
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INVESTICA Ltd - www.investica.co.uk
UK rates left on hold
Sterling struggled to sustain gains above the 1.9250 level against the US dollar and was holding close to this level in New York, although Sterling was able to make a short-term challenge on 1.93 against the US currency. Sterling weakened to 0.6970 against the Euro.
The Bank of England will have to consider raising interest rates to stem inflationary pressure and curb excess domestic demand. The bank will, however, also be wary over export competitiveness, especially after the trade data. Any move to increase interest rates would risk further Sterling appreciation and sustain greater damage to export markets. The bank's task on interest rates has, therefore, been made more difficult. Overall, the bank should be content to wait for further developments, especially as the MPC will not want to take action ahead of the budget next week. There is also no urgency over a move and there are still major uncertainties over housing-market trends.
The poor trade figures on Wednesday will undermine Sterling sentiment and revive medium-term unease over the fundamentals. In the medium term, Sterling depreciation would also make it easier for the central bank to consider a rate increase.
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