Pound Tumbles as BOE Signals There's Room to Keep Key Rate Low

  • BOE held interest rates at 0.5%, as forecast by economists
  • Forward markets signal no increase until at least late-2016

The pound tumbled versus the euro, and reversed an advance against the dollar, after the Bank of England signaled there’s scope to keep interest rates at a record low as inflation weakness persists.

“The pound’s trading lower on the BOE headlines,” Neil Jones, London-based head of hedge-fund sales at Mizuho Bank Ltd., wrote in an e-mail. “Inflation-target expectations have been pushed back,” but “I do expect the BOE to remain more hawkish relative to most other central banks which should bode well for sterling performance in the longer term,” he wrote.

Pound Falls Versus 14 of 16 Major Peers After BOE Minutes
Pound Falls Versus 14 of 16 Major Peers After BOE Minutes

Sterling weakened 0.4 percent to 73.67 per euro as of 4:41 p.m. London time, and fell 0.1 percent to $1.5303, retreating from a two-week high. It dropped against all but two of its 16 most-traded counterparts.

The BOE’s Monetary Policy Committee voted 8-1 to keep the key rate at 0.5 percent, while the minutes of its October meeting showed officials weighed the risk of a further global slowdown against resilient domestic demand and consumer spending.

Benchmark 10-year government bond yields fell one basis point, or 0.01 percentage point, to 1.82 percent. The 2 percent bond due in September 2025 rose 0.08, or 80 pence per 1,000-pound face amount, to 101.66.

Rate Path

Britain’s currency has fallen for the past three months against the dollar and the past two versus the euro as signs global growth is slowing and the Federal Reserve’s decision to delay tightening policy prompted investors to push back their view of the BOE’s own rate path.

Markets suggest the U.K. central bank won’t boost its 0.5 percent main rate until late-2016 and its decision to hold fire Thursday was predicted by all 41 economists in a Bloomberg survey. Forward contracts based on the sterling overnight index average, or Sonia, suggest that a full quarter-point increase won’t come until after November 2016.

In the minutes, the BOE said the U.K. economy is withstanding pressures from the slowdown in the global economy.

This should eventually prompt investors to bring forward bets on when the central bank will tighten policy, said Petr Krpata, a London-based foreign-exchange strategist at ING Groep NV.

The delay in when traders anticipate a rate hike is “extremely excessive given the strength of the domestic economy,” Krpata said, forecasting the pound will stengthen to 71 pence per euro within a month. Gains will be “mainly against the European currencies where other central banks are in easing mode.”

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