Pound Weakens After BOE Policy Makers Drop Call to Raise Rates

The pound weakened as details of the Bank of England’s first unanimous decision on monetary policy since July damped the outlook for higher interest rates that would support the currency.

Sterling fell against 13 of its 16 major peers after policy makers Martin Weale and Ian McCafferty dropped their call for an interest-rate increase as plunging oil prices raised the risk that slow inflation would become entrenched. Separate data showed wage growth in the three months through November was less than analysts estimated. U.K. government bonds advanced, with 30-year yields dropping to a record low.

“The two hawks have rejoined the broader dovish camp within the MPC and that’s going to keep sterling under pressure,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “Although there are some improvements in some of the labor-market data, the pick up in the wages were disappointing; not really gaining the momentum the market has been looking for.”

The pound weakened 0.7 percent to 76.79 pence per euro at 4:08 p.m. London time. The U.K. currency reached 75.96 pence per euro on Jan. 16, the strongest level since February 2008. Sterling fell 0.2 percent to $1.5123.

Inflation Forecast

The Monetary Policy Committee forecast that U.K. inflation will drop to zero in the first quarter and there’s a “roughly equal chance” that it could fall lower. Policy “could and would be adjusted” if needed to meet the 2 percent target, officials said, according to minutes from the Jan. 7-8 meeting. The benchmark interest rate has been at 0.5 percent since March 2009.

Annualized inflation cooled to 0.5 percent in December, matching a record low.

The U.K. unemployment rate based on International Labour Organization methods declined to a six-year low of 5.8 percent from 6 percent. The median forecast in a Bloomberg News survey was for a drop to 5.9 percent.

Wages excluding bonuses grew 1.8 percent in the three months through November from a year earlier, missing analyst estimates for a 1.9 percent increase.

Investors are pushing back bets for when the BOE will increase interest rates amid concern a more than 50 percent plunge in the price of crude oil will keep inflation subdued.

Implied Yield

The implied yield on three-month short-sterling interest-rate futures contracts expiring in December fell five basis points, or 0.05 percentage point, to 0.69 percent.

Investec Securities Ltd. forecasts the BOE will increase rates by 25 basis points in November, London-based chief economist Philip Shaw wrote in a client note dated Jan. 21. Investec previously expected an increase in August.

The MPC “will not seriously contemplate raising rates until the downside risks to the medium-term inflation outlook have passed,” Shaw wrote.

Nomura Holdings Inc. forecasts the first rate increase will be in February 2016, later than its previous call for August. Deutsche Bank AG estimates an increase in May 2016, also from an earlier prediction for August.

Pacific Investment Management Co. said it sees “compelling investment value” in five- to 10-year bonds as the BOE delays raising borrowing costs, Mike Amey, a London-based money manager, wrote in a report on the company’s website.

Benchmark 10-year gilt yields fell four basis points to 1.49 percent after reaching 1.46 percent, the lowest since August 2012. The 2.75 percent bond due in September 2024 rose 0.415, or 4.15 pounds per 1,000-pound face amount, to 111.26.

Thirty-year yields dropped one basis point to 2.16 percent after falling to 2.132 percent, the least on record.

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