BLBG:Pound Drops as BOE Says Rising Yields Weigh on Economic Outlook
The pound slid at least 0.9 percent against all 16 of its major peers after the Bank of England said increases in market rates aren’t justified and may weigh on the outlook for growth, prompting speculation it will add stimulus.
U.K. government bonds and short-sterling futures jumped as the central bank kept its quantitative-easing target at 375 billion pounds ($566 billion). The decision was predicted by all 44 economists in a Bloomberg survey. Sterling has strengthened in the past month and gilts dropped as data including services, manufacturing and construction growth has indicated the economy is gathering momentum.
“The statement is probably a little bit more dovish than the market was expecting, pushing back on the rise in longer-term interest rates and suggesting that monetary policy will remain accommodative for some considerable time,” said Paul Robson, a senior currency strategist at Royal Bank of Scotland Group Plc in London. “This leaves sterling vulnerable against the dollar and the euro.”
The pound fell 1.2 percent to $1.5103 at 12:52 p.m. London time after reaching $1.5075, the lowest since May 29. Britain’s currency depreciated 1 percent to 86.01 pence per euro. It earlier reached 86.33 pence, the weakest since April 17.
Today’s announcement was the first by the central bank since Mark Carney became governor on July 1. The nine-member Monetary Policy Committee also left the U.K.’s main interest rate at a record-low 0.5 percent.
‘Implied Rise’
Ten-year gilt yields fell five basis points, or 0.05 percentage point, to 2.35 percent after rising as much as three basis points. The rate reached 2.59 percent on June 24, the highest level since October 2011. Two-year note yields slid seven basis points to 0.34 percent.
“The implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy,” the London-based central bank said in a statement. The rise in market interest rates would weigh on the outlook, it said.
The implied yield on the short-sterling contract expiring in September 2014 fell 11 basis points to 0.73 percent.
Former Bank of Canada Governor Carney is the first foreigner to run the 319-year-old U.K. central bank. The Bank of England typically doesn’t release statements after leaving policy unchanged. The decision to do so today reflects comments Carney made earlier this year to use communication, including forward guidance, as one of his policy tools.
He has indicated a preference for further monetary action, saying central banks aren’t “maxed out” and that guidance on future policy can help them respond to economic shocks and financial imbalances.
To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
