httpvh://www.youtube.com/watch?v=KbN76AUheiY 

Both interest rate announcements yesterday went according to the playbook. The Bank of England kept interest rates on hold and announced no further plans for quantitative easing. The ECB elected to hike interest rates by 25 basis points increasing them to 1.5%. Both moves were forecast by market participants and already priced in.

 In a high inflation – low growth environment the BoE has maintained its stance in supporting growth by keeping rates low. Although inflation in the UK is running at 4.5% the view is that this is largely down to higher fuel and food costs. Whilst the ECB’s stance has always been more hawkish and despite issues in the Eurozone periphery the central bank have consistently focussed on price stability. At last month’s ECB press conference Trichet used language like ‘strong vigilance’ when discussing inflation which all but guaranteed the hike that followed yesterday.

 We will have to wait 2 weeks before the BoE meeting minutes are released which will have a greater bearing on Sterling. However, we gained an insight into the ECB’s thinking in the press conference that followed the decision yesterday. Trichet said that inflation would be monitored ‘very closely’ which is seen as a sign we may see another hike before his term ends in October. Importantly he said that despite Moody’s downgrade the ECB would support Portugal by continuing to accept the country’s debt as collateral in return for funding.

 On the data front, UK manufacturing output data rebounded from April’s dismal figure and posted the biggest gain we have seen in 12 months. However, as has been the theme for the UK of late, industrial production was worse than expected giving out mixed messages on the strength of the economy.

 Following Trichet’s comments in support of Portugal, there was more good news for the bulls as US employment data came out better than expected. ADP employment change and initial jobless claims both impressed and the hope is that US non-farm payrolls data will follow suit at 1.30pm today.