Pound soars against Euro as Bank of England and European Central Bank at odds

Inflation: Bank of England facing 'tricky dilemma' says Martins

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In a move that surprised markets today the Bank of England’s Monetary Policy Committee (MPC) voted 8-1 to raise interest rates to 0.25 percent. Head of Investment at Interactive Investor Victoria Scholar commented: “Traders have been caught off guard with the unexpected hike, sending the pound and the FTSE 100 sharply higher. The banking sector in particular has caught a bid, with shares in Barclays and Lloyds surging by more than four percent.” Meanwhile the ECB has left rates unchanged with its benchmark refinancing rate staying at a historic low of zero percent.

The Pound is now trading at 1.18 to the Euro, up from 1.17 earlier this morning.

The FTSE 100 rose just under one percent.

Portfolio manager at Quilter Investors, Paul Craig commented: “Although inflation is at record-levels for the bloc, ECB board members will be most concerned with the virus outbreak and economic deterioration, in Germany notably.”

The German economy has been struggling lately with supply chain issues causing major problems for many of its industries with the car industry particularly badly hit.

This week the Ifo institute cut growth forecasts for Germany next year from 5.1 percent to 3.7 percent.

It also predicted the economy would shrink by 0.5 percent in the final three months of this year.

At the same time Germany is also facing soaring inflation which has reached a record high of 5.2 percent.

Across the Eurozone inflation is at 4.9 percent, far above the ECB’s two percent target.

The ECB currently projects inflation to run at 3.2 percent in 2022 before falling to 1.8 percent in 2023.

Speaking in a press conference following the announcement ECB president Christine Lagarde said energy prices were expected to stabilise next year with pressures from global supply chains also predicted to subside.

Although interest rates will remain unchanged the ECB has however reduced its level of stimulus through quantitative easing.

Mr Craig commented: “Should virus fears recede, 2022 looks set to be a decent year for the bloc economically speaking and as such it is in a good position to begin to scale back the extraordinary support.”

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Like the Eurozone the UK is also suffering surging inflation with the Bank of England revising predictions to a peak of six percent early next year.

It is already running at 5.1 percent.

The Bank has increasingly come under pressure to act with the International Monetary Fund this week warning it against “inaction bias”.

Speaking to Express.co.uk though a former Bank of England member, Andrew Sentance, cautioned today’s hike may not be enough to head of inflation further ahead, suggesting a rate of up to two percent next year may be needed.

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