Pound Falls to Eight-Month Low as Inflation Rate Turns Negative

  • New BOE official Vlieghe says growth is solid, `not fantastic'
  • Markets pricing first BOE rate increase beyond Dec. 2016

The pound touched the weakest level versus the euro since February as Britain’s inflation rate unexpectedly turned negative for the second time since 1960 in September, strengthening the case for the Bank of England to delay raising interest rates.

Sterling dropped versus 12 of its 16 major peers, posting its steepest decline against the dollar in almost three weeks. BOE policy maker Gertjan Vlieghe said inflation risks are skewed to the downside and that price growth needs to pick up before he will vote for a rate increase. His comments to U.K. lawmakers were his first public remarks since joining the Monetary Policy Committee last month.

“Already before the data the market was nervous and prepared for disappointing data - and that was exactly what was delivered,” said Esther Reichelt, a currency strategist at Commerzbank AG in Frankfurt. “As long as CPI data don’t show a pick up in inflation, the longer the MPC might tend to stay on hold. At least the data don’t give a reason for increased nervousness within the MPC to hike rates.”

The pound depreciated 0.9 percent to 74.63 pence per euro as of 4:28 p.m. London time and touched 74.93 pence, the weakest level since Feb. 5. Sterling dropped 0.7 percent to $1.5246, its biggest decline since Sept. 23.

Prices Slide

U.K. consumer prices fell an annual 0.1 percent after stagnating in August, the Office for National Statistics said. Economists had forecast a further month of stagnation. Prices last declined in April, which was the first sub-zero reading since 1960. 

The data also showed core consumer-price growth increased 1 percent, compared to analysts forecast for a 1.1 percent gain. Traders will also be watching employment and wage growth data on Wednesday for more clues about the strength of the U.K.’s economic recovery.

Sterling was boosted earlier in the year amid signs that the U.K. was growing at a pace that would allow the BOE to raise interest rates On a trade-weighted basis, the U.K. currency rose to the highest level in seven years in July. It touched the lowest level since February on Tuesday.

“The headwinds, the adverse forces, are that we have a reasonably strong exchange rate,” Vlieghe said. “We are operating in a generally weak global environment, so the exchange rate is a headwind.” In his comments to the U.K.’s Treasury Select Committee he described economic growth as solid “but not fantastic.”

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 after December 2016. The central bank’s official rate has been at a record-low 0.5 percent since March 2009.

“It looks like it will take a little longer than the bulls expected to get annual CPI above 1 percent,” said Jordan Rochester, a currency strategist at Nomura International Plc in London. “The BOE pricing has been pushed out so far that this doesn’t really change the ball game too much. The BOE is still likely to hike earlier than what is priced.”

(A previous version of this story was corrected to show Vlieghe said the pound was “reasonably strong” and not “unreasonably strong” as initially reported.)

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