Pound Slumps to 15-Month Low Against Euro on BOE MinutesDavid Goodman
The pound slumped to a 15-month low against the euro after Bank of England minutes showed more officials voted to expand asset purchases at this month’s meeting, a policy that that typically debases a currency.
Sterling dropped to the lowest level since June versus the dollar after minutes of the central bank’s Feb. 7 meeting showed policy makers also considered an interest-rate cut. Governor Mervyn King and Paul Fisher joined David Miles in voting to increase the target for bond purchases by 25 billion pounds ($38.3 billion) to 400 billion pounds, though they were outvoted by the remaining six members of the Monetary Policy Committee. U.K. government bonds declined.
“The market clearly has sterling in the cross hairs,” said Gavin Friend, a foreign-exchange strategist at National Australia Bank Ltd. in London. “King and Fisher have joined Miles in voting for more quantitative easing and the market has thumped sterling on the back of that.”
The pound depreciated 0.5 percent to 87.26 pence per euro at 4:38 p.m. London time after reaching 87.65 pence, the weakest level since October 2011. Sterling fell 0.9 percent to $1.5291, after sliding to $1.5282, the lowest since June 1.
The vote marks the fourth time King, who is retiring in June and will be replaced by Mark Carney, has been outvoted as governor of the London-based central bank.
The minutes showed policy makers also considered lowering the benchmark interest rate from its record-low 0.5 percent, purchasing assets other than gilts and changing the remuneration on bank reserves. These options had been considered in the past and the drawbacks noted previously remained.
This year “just goes from bad to worse for the pound as this morning’s MPC minutes came out with a surprisingly bearish vote,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “This continues the snowball of gloominess which has been gathering pace against sterling with the downside risk now getting more worrying for the friendless pound.”
The pound has fallen 5.4 percent this year, the second-worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. Only the yen has weakened more, losing 7 percent.
The 10-year gilt yield rose two basis points, or 0.02 percentage point, to 2.20 percent. It fell as much as nine basis points after the minutes were released. The price of the 1.75 percent bond due September 2022 slid 0.15, or 1.50 pounds per 1,000-pound face amount, to 96.15.
The Bank of England minutes also said that “higher gilt yields represent a tightening” of monetary policy. The rate on the 10-year gilt has climbed 39 basis points this year.
“We had expected that the MPC would become concerned about the tightening effect of higher gilt yields,” Sam Hill, a fixed income strategist at Royal Bank of Canada in London, wrote in an e-mailed note. “We are surprised about the extent of their apparent sensitivity to a comparatively modest move in the grand scheme of things. Another move higher in yields could require the MPC to walk the walk on asset purchases.”
The U.K. Debt Management Office is scheduled to auction 2.25 billion pounds of 10-year gilts tomorrow.
The yield spread between 10- and two-year securities widened as much as five basis points to 193 basis points, the most since March 22.
U.K. government bonds lost 2.7 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 1.5 percent and Treasuries fell 1 percent.