Pound Declines as BOE’s Broadbent Says ‘Not Yet’ to Higher Rates

The pound fell against the dollar for a seventh day as Bank of England policy maker Ben Broadbent suggested the U.K. economic recovery may not be strong enough to warrant an interest-rate increase.

Sterling also weakened versus the euro, as the European Central Bank stopped short of quantifying a target for covered bonds and asset-backed securities purchases under its stimulus program. Broadbent said in an interview with ITV that Britain is “not ready yet” for a rate increase. Policy maker Kristin Forbes said the pound’s downward pressure on inflation may start fading after peaking at the end of 2014. Short-maturity gilts rose.

“These two don’t sound like they will be voting for a rate hike any time soon,” said Kathleen Brooks, European research director at Forex.com in London. “Central bank expectations are critical for the direction of G-10 currencies right now. If the market feels the BOE is getting cold feet about a rate hike, then we could see further pound weakness.”

Sterling dropped 0.4 percent to $1.6130 at 4:40 p.m. London time. It weakened 0.6 percent to 78.49 pence per euro. The pound has strengthened against the common currency in the past six months on speculation that the Bank of England will raise interest rates and the ECB will ease policy further.

The British currency’s slide today trimmed its gain in the past month to 1.2 percent, still the best performer after the U.S. and Canadian dollars, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies.

BOE Comments

The five-year gilt yield dropped four basis points, or 0.04 percentage point, to 1.67 percent. The 1.75 percent note maturing in July 2019 rose 0.195, or 1.95 pounds per 1,000-pound face amount, to 100.375.

Market price-growth expectations, as measured by five-year sterling inflation swaps, dropped to 2.92 percent today, the lowest since January 2013 on a closing market basis. Consumer-prices rose at a rate of 1.5 percent in August, below the BOE target of 2 percent for an eighth month, the most recent data show.

The pound strengthened 6.3 percent in the past year, the best performer after the U.S. dollar among 10 developed-nation currencies, according to Bloomberg Correlation-Weighted Currency Indexes. The strength has pushed down inflation today by about 0.8 percentage points, Forbes said in London yesterday, citing economic models. The effect will get larger toward the end of the year and depress inflation by as much as 1 percentage point, she said.

“Although this dampening effect fades over time, the simulations suggest that the drag could persist for several more quarters,” Forbes said. “The key implication is that sterling’s appreciation that began early last year is still dampening inflation today.”

ECB’s Plan

The pound is set for the biggest one-day depreciation against the euro since Sept. 8, when it lost 0.9 percent against the common currency.

The ECB kept its benchmark rate at 0.05 percent today. While the central bank pushed ahead with its asset-buying plan, which is part of its stimulus program, it failed to provide details on the size of the purchase.

“It’s difficult to say right now how aggressive the ECB is going to be expanding its balance sheet,” said Valentin Marinov, Citigroup Inc.’s London-based head of European Group-of-10 currency strategy. “The market was clearly looking for the target” for the size of asset purchases, he said. “They didn’t get it so they unwind euro shorts.”

Sterling has appreciated about 5.9 percent against the euro so far this year, according to data compiled by Bloomberg.

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