special reports

Instant Insight - BOE Shocks With Rate Hike to 5.25%

Thursday, 11 January 2007 11:14:44 GMT  |  Boris Schlossberg, Senior Currency Strategist

In a surprise move, the Bank of England raised rates by 25 basis points to 5.25% stating that "growth continues at a firm pace" and risks to inflation appear more to the upside.  The UK economy has shown remarkable resiliency over the past several months as the consumer sector led by a strong rebound in retail sales firm labor market and near double digit increase in housing has provided  a solid base for economic growth. 

What has been even more impressive is UK recovery in the manufacturing sector with today's release showing upside surprises in Industrial production and the first positive reading in manufacturing production in three months. The MPC is clearly trying to nip any inflationary pressures in the bud. Today's shocker should prove beneficial for the pound especially against the yen - where expectations of any rate hike by the BOJ have been put on hold. Last time the BoE surprised with a rate hike the GBP/JPY cross moved 700 points higher within two weeks. While such a spurt is unlikely given the lofty levels that the pair currently trades at, the news should continue to attract more carry capital in to the cross now that the interest rate differential has increased.

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