Pound Ends Slide; Pimco Says Mid-2016 Rate Increase Plausible

  • BOE seems to be 'distancing itself' from Fed policy: Amey
  • Markets pricing in almost a year between Fed and BOE liftoff

The pound rose against the dollar, breaking a three-day run of losses that pushed it to a six-month low, as investors re-assessed how quickly the Bank of England will follow the Federal Reserve in raising interest rates.

Sterling tumbled last week as BOE Governor Mark Carney and his colleagues signaled Thursday that Britain wasn’t ready for higher borrowing costs. A day later, traders stepped up bets on the Fed lifting U.S. interest rates in December after a Labor Department report showed employers added the most jobs this year in October.

While money markets indicate that the BOE’s first rate increase since 2007 will only come a year from now, Pacific Investment Management Co. said a U.K. move around the middle of next year is “perfectly plausible.”

The BOE Monetary Policy Committee’s challenge is understanding how “the opposing forces of domestically generated strength and imported weakness will influence U.K. economic growth and inflation,” London-based money manager Mike Amey wrote in a Nov. 6 blog on Pimco’s website.

Last week’s BOE comments were “to reinforce the message that U.K. monetary policy need not be perfectly correlated to the U.S.” and the MPC appeared “to be distancing itself from Fed policy,” he said.

The pound rose 0.5 percent to $1.5120 as of 4:40 p.m. London time, after sliding on Friday to $1.5027, the lowest since April 23. It climbed 0.2 percent to 71.21 pence per euro.

Government bonds were little changed, with the 10-year gilt yield at 2.04 percent. It touched 2.09 percent earlier, the highest since July 21. The price of the 2 percent bond due in September 2025 was at 99.62 percent of face value.

Gap Year

Forward contracts based on the sterling overnight index average, or Sonia, indicate that a full quarter-point boost to the U.K.’s main rate won’t come until November 2016. That’s at least an eight-month delay from the first-quarter BOE liftoff analysts in a Bloomberg survey predict and 11 months after the December 2015 Fed rate increase seen by economists.

That gap might be too wide, according to Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London.

“There’s still a reasonable probability after the Fed moves, the BOE will move within six months of that,” he said. “Whilst there are obvious headwinds from emerging markets and clearly sterling strengthening too fast could impact export demand, there is still a case to be made about markets being a little too sanguine about the risks of earlier BOE tightening.”

Citigroup Inc.’s Economic Surprise Index for the U.K. is at its highest in two months. While the measure has been negative since April, meaning economic releases have been weaker than forecast, it’s risen steadily in recent days, signaling an improvement.

‘Too Aggressive’

CIBC’s Stretch recommends selling euro-sterling rallies because the pound’s move lower last week was “too aggressive.”

Pimco’s Amey said it’s likely the BOE will raise rates from a record-low 0.50 percent next year on the back of higher wages and domestically generated inflation.

“That still means that a U.K. rate hike around the middle of 2016 is perfectly plausible,” he wrote. “But it does not look like it is coming earlier than that.”

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