Pound Falls to 2-Week Low as Carney Sees Gradual Rate Increases

  • Officials reiterate they are debating timing of increase
  • U.K. bonds rise with major peers after Russia jet downed

The pound touched its lowest level in two weeks versus the dollar as Bank of England Governor Mark Carney said in testimony to lawmakers that Britain’s low-interest rate environment is likely to remain for some time.

Sterling declined for a second day versus the euro as BOE Chief Economist Andrew Haldane who, like Carney, addressed lawmakers in London Tuesday, said risks to the inflation outlook were to the downside. The central bank’s latest Inflation Report, published Nov. 5, marked a change in tone with a message that the economy wasn’t ready for higher borrowing costs. That was after officials had spent months suggesting rates were headed higher.

“Both Carney and Haldane sounded dovish and confirmed the stance the BOE took in the recent Inflation Report,” said Roberto Mialich, a senior foreign-exchange strategist at UniCredit SpA in Milan. “In the near term, there’s still downside risks for sterling, considering this picture.”

The pound dropped 0.4 percent to $1.5061 as of 4:25 p.m. London time and touched $1.5055, the lowest since Nov. 9. Sterling weakened 0.4 percent to 70.64 pence per euro. It has retreated from 69.83 pence on Nov. 18, the strongest level since Aug. 6.

Sterling has fallen about 2 percent versus its U.S. counterpart since Nov. 4, the day before the Inflation Report, which reinforced speculation that interest-rate differentials will stay in favor of the dollar. The extra yield, or spread, that investors get for holding U.S. Treasury two-year notes instead of similar-maturity U.K. debt was 31 basis points on Tuesday, the widest since July 2006 based on closing prices.

BOE Timing

While the BOE officials emphasized that the current debate is focused on the timing of the first rate increase in almost seven years and are not debating potential easing, they also stressed that moves will be slow and gradual.

Chancellor of the Exchequer George Osborne presents his year-end fiscal plan Wednesday, followed two days later by a government report that, according to a Bloomberg survey of analysts, will confirm U.K. economic growth slowed in the third quarter.

Forward contracts based on the sterling overnight index average, or Sonia, aren’t pricing a BOE interest-rate increase until after January 2017. That’s still supportive relative to the euro area, where the central bank has signaled it will expand stimulus next month. In contrast, futures showed a 74 percent chance that the Federal Reserve will raise U.S. rates next month.

U.K. government bonds advanced with their major peers Tuesday after Turkish forces on the Syrian border shot down a Russian warplane, boosting demand for the relative safety of fixed-income assets. The 10-year yield touched the lowest level in almost four weeks.

Benchmark 10-year gilt yields fell two basis points, or 0.02 percentage point, to 1.86 percent and reached 1.83 percent, the lowest since Oct. 28. The 2 percent bond due September 2025 rose 0.155, or 1.55 pounds per 1,000-pound face amount, to 101.25.

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