Pound Weakens as Slowing Wage Growth Weighs on BOE Rate Outlook

  • BOE's Carney says conditions for rate increase not in place
  • Futures show 76% probability of Fed liftoff on Wednesday

Is Britain Ready for a Rate Increase?

The pound dropped for a third day against the dollar as U.K. pay growth slowed in the three months through October, weighing on the prospect of a Bank of England interest-rate increase even as the U.S. Federal Reserve looks set to raise borrowing costs.

Sterling weakened toward a seven-week low versus the euro after the Office for National Statistics said weekly wages excluding bonuses grew 2 percent from a year earlier, less than the 2.3 percent forecast by economists in a Bloomberg survey.

BOE Governor Mark Carney said in an interview with the Financial Times published Tuesday that the economic developments required to justify the first increase in U.K. benchmark borrowing costs in eight years aren’t yet in place.

“This just pushes the rate-hike story back somewhat, and Mr. Carney wasn’t exactly bringing it forward either,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “I wouldn’t be surprised if we have a drift down towards $1.4925, assuming that we get what we expect from the Fed.”

The pound fell 0.2 percent to $1.5007 at 5:02 p.m. London time. Sterling depreciated 0.3 percent to 72.86 pence per euro, after touching 73.02 pence Tuesday, the weakest level since Oct. 22.

Bond Yield

U.K. government bonds were little changed, with the 10-year gilt yield at 1.95 percent. The price of the 2 percent security due in September 2025 was 100.475 percent of face value.

BOE Deputy Governor for Markets and Banking Minouche Shafik said on Monday that wage pressures weren’t strong enough to justify an increase in interest rates. The central bank has held its key rate at a record-low 0.5 percent since 2009 and forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a quarter-point rate increase until February 2017, data compiled by Bloomberg show.

That contrasts with the U.S., where futures contracts show a 76 percent likelihood that the Federal Open Market Committee will raise its benchmark from near zero later on Wednesday, bolstering the dollar.

“As long as inflation is low in the U.K., the incentive for the Bank of England and for Carney is to make sure the pound does not follow the dollar higher,” Athanasios Vamvakidis, head of Group-of-10 currency strategy at Bank of America Merrill Lynch in London, said in an interview on Bloomberg Television’s “On The Move” with Guy Johnson and Jonathan Ferro. “He will sound dovish, he can afford to do that.”

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