RTTNews - Ahead of the interest rate decision by the Bank of England, the British pound recovered from a 3-day low against its major counterparts.
The Monetary Policy Committee of the Bank of England is widely anticipated to keep interest rates on hold at 0.50%, a level unmatched in the Bank's 315-year history and only marginally above its floor of zero.
The BoE, facing a recession and tumbling inflation, has slashed borrowing costs from a 5% rate last October to 0.5 percent, which is the lowest level since formation of the central bank in 1694.
Also, the central bank is seen maintaining the current asset purchase program at 125 billion pounds, after it was extended at the previous meeting by 50 billion pounds.
To contain the deep economic contraction, the BoE had announced a programme in March to buy GBP 75 billion of public and private financial assets, financed by issuing extra Bank of England reserves. In May, the central bank decided to raise the asset purchase plan by GBP 50 billion to a total of GBP 125 billion, when it had kept rates at the all-time low of 0.50 percent. The central bank should seek to complete the GBP 125 billion purchases in July, the members concurred.
Members considered the case for increasing the size of asset purchase plan by GBP 75 billion, but they seemed to have decided that there was no pressing need for the larger extension at the meeting. The programme would be reviewed every month and based on the MPC's assessment, the amount could then be increased on decreased, the minutes revealed.
The British Chambers of Commerce urged the MPC to accelerate the tempo at which they execute the asset purchase programme and to increase the scheme's size beyond GBP 125 billion.
Under the quantitative easing programme, the Bank of England prints money and uses it to buy government and corporate bonds to increase the amount of money in circulation and stimulate economic activity.
The global financial crisis and international credit crunch, which began in late 2007, sparked a stubborn global downturn. As a result, Britain was dragged into deeper recession in the first quarter of 2009.
According to official data published last month, Gross domestic product declined 1.9% in the first quarter, which was the largest contraction since the early days of the Margaret Thatcher government in 1979.
Regarding economic activity, Chancellor Alistair Darling in his budget statement said he sees a 3.5% contraction in 2009, the worst since the Second World War and expects the economy to resume growth by the end of this year and grow 1.25% next year.
BoE deputy governor for monetary policy, Charles Bean also shared a similar view. On May 22, he said the bottom in economic activity may not be too far off.
Bean stressed that the primary objective of the monetary policy committee is to control inflation, not growth. The BoE expects inflation to soon fall below the bank's target of 2%. It is more likely than not to remain there for the next year or two.
Meanwhile, the central bank said in its inflation report that the economy would resume growth from early 2010 and reach around 2.5% in a two-year period. Governor Mervyn King sees relatively slow and protracted recovery in the UK economy.
The strongest sign yet that the British economy could begin its recovery before the end of the year was provided yesterday by a survey showing that the key services sector grew in May for the first time in a year, while the price of houses unexpectedly increased.
The CIPS/Markit PMI for the British service sector unexpectedly moved above the 50-mark to record a growth for the first time in a year. The indicator rose to 51.7 in May from 48.7 in April, while forecast was for a reading of 49.5. That was the sixth consecutive gain.
British consumer confidence rose to a six-month high in May on expectations that the economy may recover from the recession, a closely watched survey revealed. The Nationwide Building Society said its consumer confidence indicator climbed to 53 in May from 51 in April, the highest since November 2008. Meanwhile, economists had forecast a reading of 52. The British pound the pound jumped to fresh multi-month highs against its major counterparts following the news.
In addition, House prices in the UK rose 2.6% month-on-month in May, after three successive monthly declines of between 1.8% and 2.3%, the latest report from Halifax said today. Economists expected prices to fall 1%.
Annually, house prices dropped 16.3% in May compared to a 17.7% fall in the previous month. Economists expected a decline of 17.2%.
However, jobless claims are expected to increase in the economy.
David Blanchflower, former member of Bank of England's Monetary Policy Committee, said on June 1 that the worst of the downturn is not over and signs of improvement may be false dawns. He predicted U.K.'s jobless claims might increase around 100,000 a month for the next year. Blanchflower stepped down on May 31. He was replaced by David Miles.
The British pound gained ground after hitting a 3-day low of 1.6213 against the US dollar during early deals on Thursday. The pound-dollar pair is currently trading at 1.6403, compared to 1.6321 hit late New York Wednesday.
After hitting a 23 1/2 -year low of 1.3507 against the dollar on January 23, the pound has been in an upward channel and rose to a new multi-month high of 1.6666 yesterday. Thus far, the pound-dollar pair has advanced 19%.
The British pound that closed Wednesday's North American session at 0.8681 against the European currency edged down to a 3-day low of 0.8736 during Thursday's early deals. Thereafter, the pound reversed its direction and is presently trading at 0.8665.
The pound that tumbled 25% against the euro in 2008 and fell to a record low of 0.9806 on December 30 strengthened thereafter and appreciated around 12% to hit a 6-month high of 0.8579 versus the single currency yesterday.
The European Central Bank is also set to announce its interest rate decisions today. The central bank is forecast to stay pat on key rate. Following a 25 basis point reduction in May, the central bank is expected to hold the interest rate on the main refinancing operations of the Eurosystem at 1%.
Last month, the European Central Bank President Jean-Claude Trichet said the ECB expects to engage in a programme of buying euro-denominated covered bonds worth EUR 60 billion.
Trichet emphasised that preserving price stability over the medium term remains the ECB's main objective despite taking several exceptional measures to combat the financial crisis. Further, he said the global economic condition is still difficult and unpredictable environment.
The Eurostat said today in a report that Eurozone retail sales increased 0.2% month-on-month in April, compared to the 0.1% fall in the previous month, revised from 0.6% drop reported initially. Economists were looking for a decline of 0.2%.
French statistical office INSEE said today in a report that the ILO jobless rate stood at 9.1% in the first quarter, up from 8% in the fourth quarter. Economists had expected a rate of 8.6%. A year earlier, the jobless rate was 7.6%. The fourth quarter number was revised down from 8.2%.
The British currency that touched a 3-day low of 1.7336 against the Swiss franc during today's early deals bounced back thereafter. The pound-franc pair is currently quoted at 1.7500, compared to Wednesday's closing value of 1.7470.
The pound-franc pair jumped above the 1.85 level in January 2009 and reached a 1-1/2 -month high of 1.8512 on January 13. Although the U.K. currency declined thereafter, it rebounded on January 21 and extended its uptrend in the subsequent months. Since then, the pair has appreciated more than 11%.
The pound rose to 158.62 against the Japanese yen during early deals on Thursday, moving from a 3-day low of 155.91. The pound-yen pair closed Wednesday's New York deals at 156.67.
The pound has appreciated 26% against the yen since reaching a record low of 118.88 on January 23.
The Ministry of Finance said today in a report that Japanese companies reduced their spending on plant and equipments in the first three months of 2009. During January to March, capital spending plunged 25.3% from the previous year, following a 17.3% decline in the fourth quarter of 2008. Economists were expecting a 30% fall in investment.
Traders now turn toward the New York session, in which the Labor Department is due to release its customary weekly jobless claims report for the week ended May 29th at 8:30 AM ET.
The U.S. Labor Department is also scheduled to release its final report on first quarter non-farm productivity and unit labor costs at the same time. The consensus estimates call for a 1.2% increase in non-farm productivity and 2.9% growth in unit labor costs.
New York Federal Reserve Bank President William Dudley is due to speak to SIFMA conference on PPIP in New York today.
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