GBP Skids to Nine-Month Low vs. EUR as BoE Holds Rates

Britain’s pound skidded to a nine-month low against the euro on Thursday after the Bank of England voted 6-2 in favour of keeping interest rates at their record lows and revised down its growth and inflation forecasts.

BoE Governor Mark Carney and his top officials reiterated their message that they might raise borrowing costs by slightly more than investors expect over the next three years, possibly within a year.

But markets focussed on the Bank’s downward revision of its 2017 growth forecasts, to 1.7 percent from 1.9 percent in May, as well as its unexpected lowering of its inflation projections, which it now saw at just under 2.6 percent in a year’s time after peaking at around 3 percent in October.

“The 6-2 vote was as expected, however, the dovish growth and inflation (forecasts were) a surprise to the markets,” said Mizuho’s head of hedge fund FX sales, Neil Jones.

After Carney said in a press conference following the rate decision that business investment was likely to be below average, with bad consequences for productivity and wage growth, sterling fell to as low as 90.13 pence per euro, the weakest since early November EURGBP=D3.

It also fell around a cent against the dollar, plumbing a three-day low of $1.3140 GBP=D3, having earlier reached an 11-month high of $1.3267 against the U.S. currency.

Although most economists taking part in a Reuters poll had forecast a 6-2 vote to keep rates on hold, some had thought that chief economist Andy Haldane could join those calling for an immediate hike.

At the last meeting, three rate-setters voted for a hike, but one, Kristin Forbes, has since departed, and has been replaced by the more dovish Silvana Tenreyro.

“The market hadn’t priced in much possibility of a hike this month but the 6-2 vote was a bit of a dovish surprise for us,” said Yujiro Goto, an analyst at Nomura, one of the only banks that had been calling for a rate hike this month.

Brexit Uncertainty

The Bank also kept its asset purchase programmes unchanged and said a bank lending scheme would end as previously scheduled in February 2018.

A few weeks ago, investors had begun to price in the chance that the BoE might raise interest rates for the first time in a decade this month, after a series of hawkish remarks by policymakers including Carney and Haldane.

But a raft of weaker data – as well as deep uncertainty about the impact of Brexit – called that view into question. Recent figures showed the economy had its slowest growth since 2012 in the first half of this year, while inflation has also dipped and growth in wages remains weak.

Divorce talks between Britain and the rest of the EU have had a stumbling start, leaving many firms nervous about the risk of a damaging departure from the bloc in 2019.

“Ongoing concerns around Brexit combined with questions about wage growth (will) hit the pound hard,” said David Lamb, head of dealing at FEXCO Corporate Payments. “The chances of a 2017 rate hike now look dead and buried.”

Earlier, a purchasing managers’ index (PMI) survey for Britain’s dominant services industry showed a slight pick-up in July to 53.8, which came as a relief to those worried about an economic slowdown and sent sterling briefly higher.

Reuters

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell