ECB rate changes will lead to weaker sterling

FINANCIAL markets got two surprises last Thursday, one bigger than the other. The bigger surprise was the decision by the Bank of England’s Monetary Policy Committee (MPC) to raise official British interest rates by 0.25% to 5.25%.

Most commentators believed that the bank would raise rates in February, coinciding with the release of the quarterly inflation report. However, the MPC decided to surprise the markets with an earlier than anticipated move.

The second and lesser surprise was the wording of the European Central Bank’s press statement which accompanied the decision to leave official interest rates unchanged at 3.5%. This decision had been widely anticipated but there was a growing feeling that the ECB would signal another rate hike for February.