The Bank of England preference for a slow cut in interest rates will be in jeopardy if the economy deteriorates rapidly.
Sterling drifted weakened ahead of the Bank of England interest rate decision on Thursday with a dip to around 1.9520 against the dollar while the UK currency also tested 0.75 against the Euro. As expected, the Bank of England cut interest rates by 0.25%. The vote split will not be known until the minutes are released in two weekâ€™s time.
In the statement following the decision, the bank referred to a tightening of credit conditions and a slowdown in consumer spending. The MPC also warned over the inflation risks with a particular concern that rising energy and food prices could push inflation up sharply. The statement illustrates the fact that the bank would like to cut rates gradually to control inflation. The markets will not be convinced that this stance will be sustainable if there is evidence of a further deterioration in the economy.
Sterling weakened further to below 1.94 against the dollar in US trading as the US currency pushed stronger, but reversed losses against the Euro. The UK currency edged stronger in early Europe on Friday and held above 1.94 with a move back to 1.9480.