Pound Falls After BOE Considered Brexit Risks in Policy Decision

  • Minutes show officials voted 9-0 to hold rate at record low
  • Sterling weakens first time in five days versus euro

The Brexit Debate: What Happens if the U.K. Leaves the EU

The pound fell for a second day against the dollar as the Bank of England held its key rate at a record low and minutes showed officials considered the implications of the U.K. leaving the European Union in making its decision.

QuickTake Will Britain Leave the EU?

Sterling weakened for the first time in five days versus the euro. The nine-member Monetary Policy Committee, led by Mark Carney, voted unanimously to keep the benchmark rate at 0.5 percent. That followed the voting pattern of the previous two monthly policy meetings. All 44 economists in a Bloomberg survey predicted the rate would be left unchanged, where it’s been since March 2009.

The pound is the worst-performing Group-of-10 currency this year, dropping about 4 percent versus the dollar, amid concern that Britain will vote to leave the EU in a June 23 referendum. The International Monetary Fund cut its growth forecast for the nation and warned of “severe” damage to the world economy if Brexit happens. A report Thursday showed a gauge of U.K. house prices unexpectedly dropped to a nine-month low in March.

“No central bank seems in the mood to rock the boat at the moment,” said Stuart Bennett, London-based head of G-10 currency strategy at Banco Santander SA. BOE officials “just need a little more time to be certain about inflation and growth outlook,” said Bennett, who sees the central bank raising rates “sooner than the market thinks.”

Pound Slides

The pound dropped 0.4 percent to $1.4144 as of 4:05 p.m. London time, extending Wednesday’s 0.5 percent decline. Sterling weakened 0.3 percent to 79.64 pence per euro, having touched 79.25 on Wednesday, the strongest level in more than a week.

With the June EU vote approaching and inflation well below the BOE’s 2 percent target, traders are more bearish about the pound over the next year than any of its G-10 peers, options prices suggest. The net cost of three-month contracts hedging against sterling losses increased this week to 4.79 percentage points, the most since Bloomberg began compiling the risk-reversals data in 2003.

The BOE benchmark rate has been at a record low for seven years, and while economists see an increase in the first quarter of 2017, investors are much more pessimistic and have even been pricing in the chance of a cut.

Policy makers are likely to express “no material change in their outlook at all until after the referendum,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “It makes no sense to display a stronger view until we have a greater clarity over the result.”

U.K. government bonds fell, with benchmark 10-year gilt yields rising two basis points, or 0.02 percentage point, to 1.44 percent. The 2 percent security due in September 2025 dropped 0.15, or 1.50 pounds per 1,000-pound face amount, to 104.905.

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