Pound Stays Lower Versus Euro After BOE Leaves Rates Unchanged

  • BOE maintains status quo as inflation, growth outlook weakens
  • MPC votes 8-1 to keep rates at record-low 0.5 percent

The pound stayed lower against the euro after Bank of England officials kept rates at a record low in their first policy meeting of 2016.

Sterling advanced against the dollar after the decision in which policy makers cited a darkening growth and inflation outlook for the U.K. The drop in oil prices and the chaotic start to the year has caused traders to delay calls for when the central bank will raise rates into 2017. Eight of the nine members of the Monetary Policy Committee said keeping the key interest rate at a record-low 0.5 percent for now would “best balance the risks” to the economy and inflation.

“I don’t see the pound getting support in a more risk-averse environment that we are stuck in,” said Simon Smith, research director at FXPro Group Ltd. in London. “On that basis, I can still see it underperforming the dollar and the euro.”

The pound depreciated 0.2 percent to 75.64 pence per euro as of 2:50 p.m. London time, having earlier reached 76.07 pence, the weakest level since January 2015. Sterling climbed 0.1 percent to $1.4425.

FXPro’s Smith said he doesn’t see people “choosing the pound, especially if any residual expectations for a hike this year are going to be pushed out” due to the “disappointing rise in headline inflation, given what we are seeing in energy prices.”

Oil Slump

The slump in oil prices has been a drag on inflation which has languished near zero since early last year, far from the central bank’s target of 2 percent. That makes it increasingly difficult to convince investors that the BOE will lift rates any time soon.

Added to that, uncertainties surrounding Britain’s membership in the European Union has prompted banks including Goldman Sachs Group Inc., Bank of America Merrill Lynch and JPMorgan Chase & Co. to push back their forecasts for the timing of the first rate increase to the fourth quarter.

Forward contracts based on the sterling overnight index average, or Sonia, aren’t pricing in a quarter-point increase to the bank rate until after February 2017, data compiled by Bloomberg show. The contracts indicated a January 2017 increase as recently as Jan. 4.

Yields on benchmark 10-year gilts fell three basis points, or 0.03 percentage point, to 1.71 percent, having touched 1.68 percent earlier, the lowest since October. The 2 percent security due in September 2025 rose 0.28, or 2.80 pounds per 1,000-pound face amount, to 102.57.

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