UK Central Bank Raises Rates

The Pound has been idling near a multi-year high against the USD for several months now, but it can’t seem to break through the psychological resistance of $1.90. Against that backdrop, the Central Bank of the UK raised interest rates this week by 25 basis points, to 5%. This leaves UK rates potentially one rate hike away from parity with American rates, which seem more likely to be lowered than raised, given current circumstances. Narrowing interest rate differentials may remove the last barrier that has stood in the way of a broad-based USD decline. Perhaps, risk-averse investors will begin shifting some of their capital out of the US, and into UK and Europe, which is also in the midst of raising rates. The Financial Times reports:

The statement [of the UK Central Bank] did not give any clear signals as to the future path of UK interest rates and as such came as a disappointment to sterling bulls given the high probability that was attached to a follow-up rate rise in the first quarter of 2007.

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