Pound Falls as BOE Minutes Show Policy Makers Split on Stimulus
The pound fell against the euro this week, reaching a four-month low, as minutes of the Bank of England’s October meeting showed policy makers were split on the need for more stimulus to boost the U.K. economy.
Britain’s currency dropped for a fourth week against the dollar, the longest streak of declines since June, after central bank policy maker David Miles said the U.K. economy is not recovering as well as he had hoped. Gilts fell, pushing 10-year yields to the highest level in a month.
“The pound is vulnerable to the weak economic fundamentals in the U.K. and the comments from Miles suggest that the BOE will add more stimulus,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The pound is likely to remain on a weakening bias going forward.”
The pound depreciated 1 percent over the week to 81.38 pence per euro at 4:54 p.m. London time yesterday, when it reached 81.47 pence, the weakest level since June 15. Sterling declined 0.4 percent to $1.5997.
“Some members felt that there was considerable scope for asset purchases to provide further stimulus,” according to the Oct. 17 minutes of the Monetary Policy Committee’s Oct. 3-4 meeting.
Policy makers voted 9-0 to keep the bond-purchase target at 375 billion pounds at that meeting, the minutes showed. They were also unanimous in holding the benchmark interest rate at a record low of 0.5 percent.
The pound has weakened 1.3 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 3.3 percent and the dollar dropped 3.2 percent.
“The state of the economy is not as good as I had hoped a year or so back, I must admit,” Miles told the Guardian in an interview published on Oct. 18. “The last 18 months have seen no significant growth.”
Gross domestic product rose 0.6 percent in the third quarter, according to the median estimate of economists surveyed by Bloomberg before the data on Oct. 25. That would follow a contraction of 0.4 percent in the second quarter. GDP will shrink 0.3 percent over the year, according to a separate Bloomberg survey, the first contraction since 2009.
“Even if growth picked up in the third quarter, the overall trend in growth is still likely to be weak,” said Bank of Tokyo-Mitsubishi UFJ’s Hardman, who forecasts the pound will fall toward $1.55 over the next six months.
Ten-year gilt yields climbed 16 basis points, or 0.16 percentage point, over the week to 1.88 percent. The rate reached 1.96 percent two days ago, the most since Sept. 17. The 1.75 percent security maturing September 2022 fell 1.43, or 14.30 pounds per 1,000-pound face amount, to 98.83.
Gilts returned 1.8 percent this year through Oct. 18, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 2.2 percent and U.S. Treasuries rose 1.3 percent.
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