Pound Declines a Fourth Day Versus Dollar as BOE Maintains Rates

The pound fell for a fourth day versus the dollar as Bank of England officials held interest rates at 0.5 percent, with markets indicating they won’t be raised for another full year.

Investors are pricing in the first full 25 basis-point increase in U.K. borrowing costs for March 2016, according derivative contracts. The BOE’s decision on Thursday in London to keep borrowing costs on hold, predicted by all 51 economists surveyed by Bloomberg News, takes record-low rates into a seventh year. The pound climbed against the euro as the European Central Bank announced details on its bond-buying plan.

“Certainly nothing will change this side of the general election and very unlikely this side of the year,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London, referring to the vote in May. “Interest rates are always on the periphery” for the pound, he said.

The pound fell 0.3 percent to $1.5221 at 4:38 p.m. London time, extending its 1.1 percent decline over the previous three days. Sterling appreciated 0.3 percent to 72.37 pence per euro and touched 72.23 pence, the strongest level since December 2007.

While a rate increase is still not considered to be imminent, Britain’s currency has enjoyed the best start to the year on a trade-weighted basis since 2009 as an improving economy prompted investors to bring forward bets on the first interest-rate increase since 2007.

Policy Divergence

BOE Governor Mark Carney told lawmakers last week that officials can look beyond a drop in inflation largely caused by energy and food prices, while fellow MPC member Martin Weale said that the benchmark rate may rise earlier than markets expected. The direction of monetary policy contrasts with that of the European Central Bank, which said Thursday that its 1.1 trillion-euro bond-buying plan would start on March 9.

“Just domestically you can see a case for saying, actually we’ve had enough of emergency rates,” Kate Barker, a former BOE policy maker and now a senior adviser at Credit Suisse Group AG, said in an interview on Bloomberg Television’s “Countdown” with Mark Barton and Anna Edwards. “But there are some headwinds. The weakness of the euro. There must be some concern about how strong you want sterling to be against your major trading partner.”

U.K. government bonds advanced, with the 10-year yield falling one basis point, or 0.01 percentage point, to 1.87 percent. The rate touched 1.91 percent, the highest since Dec. 19. The 5 percent gilt due in March 2025 rose 0.1, or 1 pound per 1,000-pound face amount, to 128.48.

Gilts lost 1.1 percent this year through Wednesday, the worst performer among sovereign debt in the Bloomberg World Bond Indexes. German securities returned 1.8 percent and Treasuries earned 0.5 percent, the indexes show.

Forward contracts were showing investors pricing a 25 basis-point increase in April 2016 as recently as Monday, according to MPC-dated forward Sonia fixings data provided by ICAP Plc. That assumes the current four basis-point spread for Sonia fixings below the Bank Rate would return to zero once the BOE raises rates.

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