Pound Declines as BOE Minutes Signal Possible Future Rate Cut

BOE Holds Key Rate Steady at 0.25% in 9-0 Vote
  • BOE cut interest rates last month for first time in 7 years
  • Officials vote 9-0 to keep key rate at record-low 0.25%

The pound fell after the Bank of England maintained its monetary policy while indicating there’s a chance of another interest-rate cut this year.

The U.K. currency weakened versus all of its 16 major peers. The decision to leave the benchmark rate and the asset-purchase target unchanged was forecast by all economists in Bloomberg surveys. While the nine-member Monetary Policy Committee said that recent near-term data had been stronger than anticipated since the Brexit vote, it couldn’t draw inferences for its longer-term forecasts. Officials said their view of the “contours of the economic outlook” hadn’t changed.

“This may scare off the sterling bulls for now,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment-banking unit in London. “That said, the pound outlook will depend on the incoming data and the evolving views at the MPC. ”

The pound fell 0.3 percent to $1.3196 as of 4:02 p.m. London time. It weakened 0.3 percent to 85.21 pence per euro. Sterling touched a 31-year low of $1.2798 on July 6 and is still down 11 percent versus the dollar since the June 23 referendum.

The BOE’s commentary was published alongside the latest policy decision, which showed the MPC voted 9-0 to keep the key rate at a record-low 0.25 percent. Officials were also unanimous on continuing with purchases of gilts and corporate bonds.

BOE Stimulus

The BOE cut its key rate in August for the first time in seven years and expanded its bond buying to ward off the risk of recession after Britain voted to leave the world’s biggest trading bloc.

Sterling has outperformed all of its 16 major counterparts in the past month as reports from services to construction to employment showed the U.K. economy was holding up better than some analysts predicted after the nation voted in June to leave the European Union.

Data Thursday showed a gauge of U.K. retail sales fell less in August than economists forecast, suggesting consumer confidence remained resilient in the wake of the Brexit vote.

Further downside on the U.K. currency may be limited, according to option pricing. The premium on three-month contracts to sell the pound versus the dollar, over those to buy, has narrowed since the referendum to 0.88 percentage point, close to the lowest since January. The gap widened to 6.39 percent in the run-up to the vote, the most on a closing-price basis since Bloomberg began compiling the data in 2003.

Gilts Decline

U.K. government bonds fell as investors prepared for an auction next week of 30-year debt. Benchmark 10-year gilt yields rose three basis points, or 0.03 percentage point, to 0.90 percent. The yield on 30-year bonds climbed as much as nine basis points to 1.65 percent, the highest level since Aug. 2.

“The important message here is that the MPC remains on course to ease further and the market was expecting too much of a shift on their part,” said Antoine Bouvet, a London-based rates strategist at Mizuho International Plc.  “I don’t think it’s right to expect a turnaround from the BOE until there is more clarity on the shape the Brexit negotiations will take.”

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