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The general improvement in sentiment in the financial markets over the past month has also been evident in the commodity markets.
The situation in Greece and in Spain has obviously caused great concern in London. But the Bank is also aware of the risks as a time when the economy is still in a very fragile state, and of the need to compensate for the fiscal retrenchment by maintaining a supportive monetary policy, and low short-term interest rates. There are therefore reasons for concern about the prospects for sterling. If the latest measures do succeed in reducing the fiscal deficit to manageable levels without aborting the economic recovery, and if the problems affecting the euro continue, or become even more serious, then sterling may well maintain current levels or even appreciate further.
Factory output expanded at a record pace in April, helped by investment spending associated with the export effort, and overseas demand for European capital equipment, and the trend appears to be continuing.
Sentiment in the financial markets has improved over the past month. There has been further evidence that the recovery in the global economy is continuing; the sovereign debt crisis in Europe has not yet produced a major casualty; there has been a modest rally in the euro; and the Chinese authorities have announced that they intend to adopt a “more flexible” policy towards the renminbi that is expected to allow it to appreciate at a slightly faster rate.
There was further evidence that the global economic recovery was still on track, and short-term interest rates remained very low.