Pound Drops as BOE Votes Unanimously to Hold Rates at Record Lowby
Policy committee votes 9-0 as McCafferty changes view
BOE says sterling's decline may reflect EU-referendum risks
The pound fell after Ian McCafferty, the Bank of England’s only policy dissenter over the past six months, dropped his call for higher interest rates and officials cut their growth and inflation forecasts.
Sterling weakened versus 15 of its 16 major peers. While the Monetary Policy Committee’s 9-0 vote to keep its official rate at a record-low 0.5 percent was judged by the market as dovish, Mark Carney’s speech that followed was more difficult to decipher. He started by acknowledging the external risks that prompted officials to cut growth and inflation forecasts for this year before moving on to say the whole MPC still thinks the next rate move will be up.
“My impression was a firmly dovish take from the BOE, at least until Carney said the whole of the MPC think the next move in interest rates is up,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd in London. “Given the weak global backdrop, policy makers could shift their thinking toward a cut, and I would not rule out that possibility. That will send the pound lower.”
The pound weakened 0.9 percent to 76.69 pence per euro as of 4:29 p.m. London time. Sterling fell 0.2 percent to $1.4581, after Carney’s comments on the rate path. It had dropped as much as 0.5 percent earlier.
Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a quarter-point increase to the official bank rate until after March 2017. At the turn of the year an increase in November 2016 was priced in.
While the rate decision was forecast by all economists in a Bloomberg survey, the vote switch by McCafferty was predicted by just three out of 25.
The BOE’s decision on Thursday came against a backdrop of global policy divergence, with the Federal Reserve lifting its key rate in December, the Bank of Japan adopting negative rates last week and the European Central Bank signaling its stimulus plan may be reviewed next month.
“The BOE sees external risks and austerity coming and is likely to keep rates low for a long time to offset this drag,” said Daniel Brehon, a foreign-exchange strategist at Deutsche Bank AG in London. Brehon said Deutsche Bank remains bearish on sterling.
Sterling has dropped more than 5 percent versus the dollar since the day before the BOE’s November inflation report, touching the lowest level since 2009 last month. Even so, the U.K. currency has rallied in the past two weeks, as signs of a slowing U.S. economy helped derail bets on diverging policies between global central banks.
“The MPC judges the risks to the central projection to be skewed a little to the downside in the near term, reflecting the possibility of greater persistence of low inflation,” the committee said on Thursday. “Low realized inflation will continue to moderate the increase in wage pressure in the near term.”
Bearish sentiment toward the pound was seen in options. The premium for three-month contracts to sell the pound against the dollar versus those allowing for purchases rose to 0.86 percentage point, compared with 0.85 percentage points on Wednesday, 25-delta risk reversals show.
U.K. government bonds declined for the first time in three days as commodity prices rebounded, reducing demand for fixed-income securities. The yield on 10-year gilts rose four basis points, or 0.04 percentage point, to 1.57 percent. The 2 percent security due in September 2025 fell 0.38, or 3.80 pounds per 1,000-pound face amount, to 103.775. The yield dropped nine basis points in the previous two days.