Pound's Outlook Unmoved by BOE Sticking to the Dovish Status Quo

  • Sterling pares loss versus dollar; U.K. rate kept at 0.5%
  • Forward contracts show no rate increase priced in through 2016

Currency traders’ verdict on the Bank of England’s latest policy meeting was that officials had failed to offer more insight into the path of interest rates and to shift the outlook for sterling.

The pound’s initial decline after the meeting’s minutes were published Thursday was short-lived, and Britain’s currency swung between gains and losses versus the dollar for much of the afternoon. The BOE’s nine-member Monetary Policy Committee voted 8-1 to keep borrowing costs at a record-low 0.5 percent in its last decision of the year, sticking to the status quo. Officials said low oil prices and subdued wage growth would keep a lid on inflation, similar to remarks from last month.

It’s surprising the pound weakened so much after the decision because officials barely changed their outlook, said Adam Cole, Royal Bank of Canada’s head of global foreign-exchange strategy.

Sterling pared its losses against the dollar after data showed applications for U.S. unemployment benefits jumped last week to a five-month high, interrupting steady labor-market progress.

“We are priced for the first hike in early-2017 and that’s already so late that the hurdle is high for rates markets rallying any further,” Cole said. If government bond yields don’t keep falling, the pound shouldn’t weaken considerably, he added.

The pound was little changed at $1.5175 as of 5:25 p.m. London time, after weakening as much as 0.5 percent. It climbed 0.7 percent to 72.12 pence per euro.

Economic Outlook

While assessing when to raise rates for the first time since July 2007, BOE officials have been weighing the strength of Britain’s economy against slowing global growth, including a slump in emerging markets and tumbling commodity prices. Recent data provide a mixed outlook for the U.K. economy, with services output increasing last month, while house prices fell and manufacturing production declined more than analysts forecast in October.

In the decision announced Thursday, BOE policy maker Ian McCafferty voted for a quarter-point rate increase for a fifth consecutive month. He was the only one to back higher borrowing costs.

“Expectations at the start of this year were calling for higher wages, inflation and interest rates,” said Neil Jones, the London-based head of hedge-fund sales at Mizuho Bank Ltd. “In essence, lower oil prices have pushed back inflation and interest-rate expectations -- that’s the bottom line for another 8-1 vote. The trend should be toward at least 6-3 by now.”

Rate Forecasts

Traders are betting officials will keep the Bank Rate unchanged through 2016, according to forward contracts based on the sterling overnight index average, or Sonia. German bank Berenberg on Thursday pushed back its forecast for the first increase to May 2016, from February.

U.K. government bonds were little changed, paring an earlier advance. The 10-year gilt yield fell one basis point, or 0.01 percentage point, to 1.87 percent, after sliding to 1.82 percent. The 2 percent security due in September 2025 rose 0.09, or 90 pence per 1,000-pound face amount, to 101.19.

“There would need to be a sustained firming in domestic cost pressures, compared with current rates” to push inflation back to the 2 percent target, BOE officials said in the minutes. “The price of oil had fallen markedly again, increasing the likelihood that headline inflation rates would remain subdued, and nominal-wage growth had leveled off.”

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