Carney Halts Pound’s Election Rally as BOE Cuts Growth Outlook

Updated on
U.K. Wage Growth Strengthens, Unemployment Rate Declines

The pound fell, halting a four-day rally against the euro, after the Bank of England cut its economic-growth forecasts through 2017, adding to speculation that interest rates won’t rise until the middle of next year.

Sterling weakened versus 13 of its 16 major peers as BOE policy makers led by Governor Mark Carney said inflation would remain subdued this year before returning to target in two years. The central bank said its forecasts were based on market expectations for gradual interest-rate increases starting mid-2016. Before the BOE report, the pound had extended a post-election rally when data showed U.K. wage growth increased more than economists estimated.

“The Inflation Report has taken the shine out of the wage data,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “There is generally a dovish tone to the report. However, the downside to pound will be limited as the report is clearly focusing upon a snapshot prior to recent political and economic developments.”

The pound weakened 1 percent to 72.26 pence per euro as of 4:52 p.m. London time, after appreciating to 71.23 pence, the strongest level since April 23. Sterling rose for a fourth day versus the dollar, gaining 0.5 percent to $1.5744. It touched $1.5747 after the wage data earlier on Wednesday, the highest since Dec. 17.

The pound was still the best performer in the past week among 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes, gaining 2.7 percent, as volatility has dropped after the Conservative Party secured an outright majority in Britain’s May 7 election.

Labor Data

The U.K. unemployment rate fell to 5.5 percent in the first quarter, the lowest since 2008, from 5.6 in the three months through February, the Office for National Statistics said. Wages grew an annual 1.9 percent in the same period, with regular pay jumping 2.2 percent -- the biggest increase since 2011.

Britain’s economy requires “not only a more gradual rate of increase in bank rate than in previous cycles, but also require levels of bank rate to remain below average historical levels for some time to come,” Carney said at a press conference in London.

While the BOE governor said the inflation rate may dip below zero in the coming months, there will be a pickup at the end of the year. The Monetary Policy Committee “judges it more likely than not that bank rate will increase from its current level over the forecast period” of three years, Carney said. The BOE’s official bank rate has been at a record-low 0.5 percent since March 2009.

Rate Outlook

Investors have pushed back bets on higher U.K. interest rates and are currently not fully pricing a 25 basis-point increase until July 2016, according to MPC-dated forward Sonia fixings data provided by ICAP Plc. That assumes the current four basis-point spread for Sonia fixings below the official bank rate would return to zero once the central bank raises borrowing costs.

On Wednesday, BOE Deputy Governor Minouche Shafik said the consensus on the committee was that the next policy move would be an increase in rates. In the minutes of the central bank’s April policy meeting, officials said the path of interest rates expected by investors was “exceptionally flat.”

U.K. government bonds fell for a third day. The 10-year yield climbed three basis points, or 0.03 percentage point, to 2.01 percent. The yield rose 11 basis points over the previous two days. The 5 percent bond due in March 2025 declined 0.31, or 3.10 pounds per 1,000-pound face amount, to 126.47.

“Some investors were expecting a relatively hawkish Inflation Report on the back of the April MPC minutes,” said Daniela Russell, a U.K. rates strategist at Credit Suisse Group AG in London. “There were some concerns that Carney may push back further against market pricing.” The BOE “don’t appear in any rush to raise rates,” she said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE