BOE Sees Risk of Further Pound Gain as Economy Recovers

Bank of England policy makers said the pound’s strength is putting downward pressure on inflation and there’s a risk of further increases as the economy recovers.

“Sterling had appreciated by another 1.5 percent during the month, and it was possible that this gradual appreciation would continue if prospects in the U.K. continued to be seen as increasingly favorable relative to those of it’s main trading partners,” the BOE said in the minutes of the Monetary Policy Committee’s March 5-6 meeting.

Britain’s currency reached the highest level since November 2009 versus the dollar last month amid signs the nation’s recovery is building momentum. While the economy is strengthening, BOE Governor Mark Carney has said there is scope to wait before raising the key rate from a record-low.

The minutes, published in London today, showed BOE officials voted unanimously to keep the benchmark rate unchanged at 0.5 percent this month and to maintain the stock of purchased assets at 375 billion pounds ($623 billion).

The pound climbed 0.3 percent to 83.70 pence per euro at 9:42 a.m. London time. The U.K. currency gained 0.1 percent to $1.6616, after reaching $1.6823 on Feb. 17, the highest level since 2009.

The MPC is currently operating under its first form of forward guidance, and won’t consider increasing its benchmark rate at least until unemployment falls to 7 percent. The pledge has knockouts linked to the inflation outlook and the MPC said today that none of those have been breached.

Jobless Rate

“All members agreed that the probability of inflation being above 2.5 percent in 18-24 months time remained less than 50 percent,” the MPC said. “If anything the appreciation of sterling on the month made that prospect a little less likely.”

Data released today by the Office for National Statistics showed the unemployment rate held steady at 7.2 percent in the three months through January, reinforcing the central bank’s case for keeping rates low.

The BOE updated its guidance last month and said it will focus on measures of slack once the 7 percent threshold is reached. It said today that the updated guidance “has not been mistakenly interpreted as signaling the prospect of a markedly different monetary stance.”

On the economic outlook, the BOE said there were signs that growth was broadening, though there remained “some way to go to ensure that the recovery was both balanced and sustainable.”

It said that recent weaker news from the U.S. may have been weather related and that any impact on the U.K. would probably be offset by the “continued modest recovery in the euro area.”

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