As widely expected, the BoE left its key overnight lending rate and asset purchase program unchanged as policymakers await the June 22nd budget, while European woes continue to rattle the markets. Leading up to today’s decision, various factors have prompted the BoE and will lead the central bank to hold rates for some time. One being, fiscal tightening is set to begin as the new government headed by David Cameron will be announced at an emergency budget on June 22nd, with the budget likely to include a rise in capital gains taxes. At the same time, the budget may propose an increase in employee national insurance contributions from 2011. Thus, the BoE will likely keep rates low until next year as household spending slows on the back of fiscal policy tightening. Looking ahead, the minutes of the meeting will be published on Wednesday June 23rd, a day after the budget is proposed.
Meanwhile, the European Central Bank kept interest rates unchanged at 1.00 percent. Looking at the recent actions from policy makers in the region, the ECB began buying government bonds in May in order to battle speculation that the 11-year old euro would separate. In addition, members of central bank re-introduced some longer term liquidity measures that were phased out. Going forward, the European Central Bank may keep rates near zero longer than previously forecasted as boiling deficits lead governments to phase out stimulus measures.
Weekly Spotlight: Europe Fading in the Rear View
ECB to Keep Rates Unchanged Amid Ballooning Budget Deficits
Written by Michael Wright, Currency Analyst
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Michael Wright is the author of FX Headlines, Fundamentals vs. Technical's, Weekly Spotlight, and Forex Trading Weekly Forecast
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