Market Report

Sterling reached a 26 year high against the Dollar yesterday after the Bank of England raised UK interest rates by 0.25% - now at 5.75%.

For many borrowers, notably holders of variable rate mortgages, a rate rise equates to an imminent loss of disposable income. The Bank of England, which is tasked with maintaining inflation within a range set by the UK Government, raised rates to their 6 year high in a further attempt to correct the sustained upwards creep in prices of goods and services.

It was the 5th rise since August 2006 and more than half of City economists expect a further rise before the end of the year.

Consequently, Sterling also remains strong against the Euro - and is likely to do so until a clear indication emerges that the Bank's course of deflationary action is to end. When this happens, Sterling is likely to experience an abrupt downwards correction against the Dollar and Euro.

Much will depend on the view taken by the Bank of England's Monetary Policy Committee - the independent body that sets rates. The minutes from its last meeting are released on Thursday 19 July - which will shed light on whether the committee thinks rates need to rise further and will give an indication as to how severe its inflationary outlook is.

In the longer term, it is widely anticipated that Sterling Dollar and Sterling Euro has a lot more room to go down than up.

UK businesses and investors planning to purchase Dollars or Euros over the coming year should consider the benefits of Forward Contracts - to guarantee a favourable rate and guard against the risk of a downwards shift.

RL

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