Closer inspection of the voting revealed that two members, Andrew Sentance and

Timothy Besley did not support the cut. This came as a surprise because, with all the

recent concern over lending, the credit crunch, the housing market and lower demand,

the market’s expectation was a unanimous vote in favour of a cut. In fact, even those

that supported the rate cut did so with reservations.

So what would be the reason for this trepidation given recent slowing in activity and the

need to loosen policy to help stimulate the economy? The answer lies in inflation. The

Consumer Price Index (CPI) is forecast to push back over 3% this summer and

possibly remain above the Bank of England’s upper boundary for at least three months.

This may require not one, but two letters of explanation to the Chancellor detailing why

the Central Bank has let price pressure push up so high. The reasons for cutting rates

are clear and there for everyone to see. You only have to apply for a mortgage to

witness the effects of the tighter credit conditions, but the conundrum, and so the

headache for the MPC, lies with their inflation targeting emphasis. Unlike the Federal

reserve who quickly moved to loosen the economy at the first sign of trouble. The BoE

are, on the whole, of the view that long term economic stability results from keeping

inflation in check. In this regard, the risks of near-term upside inflation are plentiful;

stemming from energy and food prices and the effects of the recent sterling

depreciation.

While activity continues to slow and the housing/ lending market stutters, the pressure

will be on the BoE to ease the economy. Nevertheless, the committee cannot possibly

cut rates while faced with a CPI figure over 3.0%. So this calls into doubt how many

cuts may materialise. Some of the recent sterling strength can be attributed to this

reduction in rate cut expectations. On the other hand, the Bank may push to introduce

cuts early in a bid to get some influence in, before their hands are all but tied.

We see a tug of war between activity data and inflation statistics. If CPI nudges ahead,

then GBP will have further cause for recovery, but another bout of soft data could ease

the pound back into the lows.

A short-term sterling recovery is underway and a push above 1.28 in GBPEUR could

see the first significant break out of the long-term downtrend we have witnessed since

August last year.

There is a whole host of data due out this week. BoE net mortgage lending and

approvals, along with the Nationwide house price index, will help further paint a picture

of the almost “Dali-like” housing market. While UK Consumer confidence will detail just

how much of a pinch the public is feeling.

The Federal Reserve will meet and decide on the policy this month. The FOMC are

widely expected to cut rates further to 2.00%.

In the past few days we have finally seen some Euro weakness. The German business

climate index has fallen from 104.8 in March to 102.4 in April, its lowest level since

January 2006. The French business sentiment index has dropped from 108 in March to

106 in April, the lowest level since December 2006. Eurozone sentiment indicators are

seen as giving a good guide to growth trends. Paired with this, the European

commission have made a downward revision of growth forecasts to 1.5% dropping

significantly from November’s prediction of 2.2% for 2008. On the back of this data it is

very difficult to make an argument for higher interest rates, but with inflation at a 16

year high of 3.6% it is equally unlikely that they will look to cut rates in the near future.

The Dollar strengthened across the board last week as durable-goods orders increased

more than forecast last month, revealing that US economy is starting to resist a

housing market slump and on Thursday data showed resilience in the labor market.

The Fed is still widely expected to cut interest rates tomorrow by 25 basis points to 2%.

There is speculation that we are approaching the end of the Fed’s interest rate cutting

cycle. A report on weak new US home sales in March failed to provide lasting clues on

the outlook for interest rates. However, with oil prices staying close to the $120 a

barrel, inflation is a significant worry and now will be just the time for U.S. rate setters

to communicate the fact in the speech that follows.

Aussie CPI gave the dollar a shot in the arm last week taking it to a 24 year high

against the US dollar; as such as we have seen repricing of interest rate hikes over the

next couple of months. It also headed higher as commodity prices continued to surge.

Movements higher are predicted in collaboration with a global commodity’s boom and

will be underpinned by its extraordinarily high yield on value terms.

An eventful week saw GBPNZD lose a percent and regain it by the end of Friday’s

trading. The Kiwi initially rallied in the build-up to the interest rate announcement but

fell on the outcome. Although the market was expecting a “no-change” decision the

majority were still looking for a hawkish slant and this should have lent support. The

Reserve Bank did indeed leave rates on hold at 8.25% but in the end, softened their

stance. The statement was a little more dovish than analysts’ expectations as the bank

cited risks of a slowdown due to economic pressures from abroad, the drought and the

strength of the currency. The market, which had positioned long for the announcement,

sold off the Kiwi and GBPNZD climbed back to the week’s starting position.

Going forward, we expect the RBNZ to leave rates on hold for the foreseeable future

and both Sterling and Kiwi remain susceptible to any weak economic releases. The

momentum going into the weekend lies with the pound and if GBPNZD opens above

2.54 we expect this to continue.

The highlight in the Canadian week was the RBC’s 0.5% cut to 3.00%. Further cuts are

forecast throughout the year although none for the near term suggesting a pause

before the dovish stance restarts. Its has stayed within touching distance of parity with

its US counterpart throughout the week primarily due to the continuing fortune of crude

oil. As prices rocketed towards $120, CAD strengthened although domestic economic

fears will continue to weigh over the near term.

Rand continued to strengthen against sterling last week as inflation data surprised to

the upside and rate hikes were priced in for June. CPIX rose 10.1% in March against a

consensus view of 9.7%. Food and energy remain to be the major contributors with a

proposed 50% hike in electricity prices slated for early June weighing on sentiment as

well. Comments from the Reserve Bank’s Governor on Friday caused a stir as the

possibility of an intra-meeting decision may be undertaken. Tito Mboweni said that “The

situation is deteriorating and we can’t say we must wait for that (the MPC meeting) date

because it is in the calendar. Economic policy can’t wait for that date.”

Please feel free to contact me at anytime regarding these briefings, if you have any questions or

thoughts on them, or if you are interested in a particular event in the calendar.

Please call us on 0800 001 5055 if you have any questions or would like to discuss the markets.

Please reply with REMOVE in the subject of your e-mail if you would like to be removed from

this list.

The above comments are only our views and should not be construed as advice. You should

act using your own information and judgement. Although information has been obtained from

and is based upon multiple sources the author believes to be reliable, we do not guarantee its

accuracy and it may be incomplete or condensed. All opinions and estimates constitute the

authors own judgement as of the date of the briefing and are subject to change without notice.

Any rates given are interbank and therefore for amounts of £5million and so are not indicative of

rates offered by World First for smaller amounts.