FXstreet.com (Barcelona) - The European Central Bank and the Bank of England will publish their monthly monetary policy decisions in a context of fast growing inflation, with strong currencies in both cases, and recent economic data pointing out to an acceleration of the economic slowdown. In such circumstances the odds are widely in favour of keeping interest rates on hold at 4.0% and 5.0% respectively.
The Bank of England's monetary policy committee will feel the pressure for a rate cut to 4.75% after the 25 basis points cut approved at lat month's meeting. Nevertheless, the risk of feeding inflation, currently running at a 2.5% year on year pace, and with food and energy prices not giving any hints of moderation, committee member should be inclined against lower rates, which could add upward inflationary pressure as well as weaken the Sterling.
On the other hand, the BoE faces an economic slowdown that has deepened in the last month, with economic indicators showing the weakest performances in quite a long time; GDP growth has slowed down to 0.4% in the first quarter of the current year, while the housing market begins to feel the consequences of the financial crisis which has tightened dramatically credit conditions for the borrowers, as a result, consumer confidence and retail sales have withdrawn to the lowest levels in years.
The European Central Bank is facing quite a similar scenario, with Inflation growing at a 3.3% yearly rate, the Bank can not raise interest rates easily with the Euro running at the highest levels ever, harming thereby European exports and weakening business as well as consumer confidences further in the Euro Area.
European economy has to face some other disturbing issue in Germany, as trade unions are negotiating wage increases by about 4.5%, an issue Trichet has repeatedly warned against, fearing the second-round inflation effect it might produce.
With those premises, the most likely outcome will be rates remaining at their current level, at least till June, so that Central Banks can weight all developments before adopting any decision.