Pound Rises as BOE Says Time for a Rate Increase Is Approaching

Updated on
  • Currency traders correct an `overly dovish interpretation'
  • McCafferty again alone in voting for immediate rate increase

BOE Holds Steady on Interest Rate, Economic Outlook

The pound advanced, approaching its strongest level in three weeks against the euro, after Bank of England policy makers said China’s slowdown hasn’t shaken their conviction that the time for the first U.K. interest-rate increase since 2007 is coming nearer.

Sterling gained versus all except two of its 16 major peers as BOE officials said in minutes of their policy meeting that the economy’s prospects are positive. The nine-member Monetary Policy Committee voted 8-1 this week to keep its benchmark interest rate at a record-low 0.5 percent, with Ian McCafferty again the lone dissenter. U.K. government bonds halted a two-day decline.

“Markets have just been forced to re-correct an overly dovish interpretation
going into the event,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. The message from the BOE is that “yes, we are mindful of the issues, but we are not necessarily thinking that’s going to change the central scenario at this point,” he said.

The pound appreciated 0.2 percent to 72.81 pence per euro at 4:16 p.m. London time. It touched 72.40 pence on Wednesday, the strongest level since Aug. 21. Sterling climbed 0.6 percent to $1.5464, after dropping 0.2 percent a day earlier.

Gains Pared

The pound fell 0.7 percent in the past month among a basket of 10 developed-market currencies, according to Bloomberg Correlation-Weighted Indexes. That pared its advance this year to 7.3 percent, the indexes show.

Risks to the U.K. economy were highlighted on Wednesday as a report showed industrial production unexpectedly declined in July. Trade data the same day also disappointed, with the goods trade deficit widening more than economists forecast and the most in a year. The Royal Institution of Chartered Surveyors said on Thursday that U.K. house prices will rise twice as fast as it previously anticipated this year, citing a worsening supply picture.

The MPC’s view on the economy echoed the one delivered by Governor Mark Carney last month. He said the BOE could look past events in China and the decision on the timing of the first rate increase would come into “sharper” focus at the start of 2016.

“The message which seems to be standing out from this minutes is that they haven’t increased their sensitivity to international developments,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “While the market may have been expecting a slightly more dovish message, it does seem that they are still in line with Carney’s previous comments, and that’s why we saw the initial market reaction.”

McCafferty maintained his dissent for a second month, arguing that building pressure on domestic costs meant tighter policy was warranted now.

Rate Outlook

Forward contracts based on the sterling overnight index average, or Sonia, suggested that a full 25 basis-point increase in the BOE’s key rate won’t come until October 2016.

“To say that we are immune to what’s going on in the rest of the world isn’t right,” Steven Major, global head of fixed-income research at HSBC Holdings Plc in London, said on Bloomberg Television before the BOE’s decision. “I’m pretty confident that there’s no change in U.K. rates for a very long time. Well into next year.”

Benchmark 10-year gilt yields were little changed at 1.86 percent. The price of the 2 percent bond due in September 2025 was 101.255 percent of face value.