Jonathan Loynes Rates Quotations

Today's cuts add a bit of pressure, ... but they're not the key factor. We're at dramatically different stages of the economic cycle (from Europe), and there are perfectly good reasons for the MPC to lower rates aggressively regardless of events on the Continent.

We remain comfortable with our view that interest rates will fall further this year as output remains below trend and inflation falls back below its target.

The stronger tone of recent data was clearly enough to prompt most members of the MPC to vote to keep interest rates on hold today, but we would not be surprised if the decision was rather closer than the markets seemed to think.

Indeed, it may only have been a reluctance to surprise the markets that stopped the committee from cutting rates (last week).

Interest rates are very likely to remain on hold for a seventh consecutive month in March, it being the only month in which the MPC has never changed rates in either direction since taking control in 1997.

The ECB may feel that the time is right to conclude that the risks to growth are now more equally balanced. Without a corresponding softening of the perceived upside risk to inflation, this would be seen as a strong signal that it is preparing to lift rates further.

Alongside the gathering momentum evident in the euro zone economy, the virtual confirmation of a hike in March supports our view that ECB interest rates will rise further than markets are anticipating.