HiFX: Foreign Exchange Specialists

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June 17 2008

May’s CPI release highlighted an up tick of inflation to 3.3% y/y well above the Bank of England’s target level of 2.0%.  As such BoE Governor Mervyn King was required to write a letter of explanation to the Chancellor of the Exchequer (Alistair Darling).  In his letter to the Chancellor, Mr. King indicated that the future path of interest rates remains “uncertain” and the MPC will continue to judge the appropriate Bank Rate level on a month to month basis.  King also expressed the BoE’s concern over the potential market volatility which may follow should rates be set to bring inflation back inline with target within 12 months.  These comments led markets to speculate that the MPC will be reluctant to take an aggressive stance towards monetary policy tightening resulting in the Pound losing upwards of 1% against the USD.