Sterling firms as markets pare back rate cut view
LONDON, Oct 10 (Reuters) - Sterling edged higher on Wednesday, underpinned by the view that the Bank of England may not have to cut interest rates in the near-term after all, given lingering inflationary pressures.
BoE Governor Mervyn King affirmed his stance on Tuesday saying that while tighter lending conditions could result in a further credit squeeze, he still believed that Britain's economy will need to slow over the coming year to keep inflation risks at bay.
Those risks included signs from business surveys and financial markets that people expect inflation to pick up, the strength of company pricing intentions, and the recent increases in world commodity prices, he said.
Analysts interpreted his remarks to mean there may be no near-term easing and that helped sterling recover from its lows.
Before King's speech, markets had priced in at least one rate cut before the end of the year in the wake of troubles at distressed mortgage lender Northern Rock (NRK.L: Quote, Profile , Research).
"King has made it clear that he wants to help the current situation (global credit crisis) through the money markets and not by cutting rates," said Divyang Shah, head of FX strategy at Commonwealth Bank.
"Our outlook on cable (sterling/dollar) has become more positive because it seems like the BoE is going to be on hold," he added.
By 0731 GMT, the pound was up 0.2 percent against the dollar at $2.0419 <GBP=>. The euro was down slightly at 69.17 pence <EURGBP=>. Against the yen, sterling rose 0.4 percent to 239.40 <GBPJPY=R>.
Sterling was at 102.8 on the Bank of England's trade weighted index <=GBP>, up 0.2 percent on the day.
The pound also seemed to shrug off downgrades to Britain's growth forecast for 2008.
British finance minister Alistair Darling said on Wednesday he had cut the government's economic forecasts because of problems stemming from the U.S. economy. But he said he was optimistic Britain would weather the storm well. A crisis in the U.S. subprime mortgage market and global lending squeeze in the last few months has raised the spectre of lower economic growth and forced the U.S. Federal Reserve to cut interest rates.
Darling cut his growth forecast for next year to 2.0 to 2.5 percent range from the 2.5 to 3.0 percent range the government had predicted in March.
Source supplied by: Reuters