Bloomberg News

Pound About 0.2 Percent From Eight-Week Low as BOE Holds Rates

August 07, 2014

The pound was about 0.2 percent from its weakest level in eight weeks versus the dollar after Bank of England officials maintained their key interest rate at a record-low 0.5 percent following a two-day meeting.

U.K. 10-year government bond yields dropped to the lowest in almost a year. The central bank’s decision was forecast by all 47 analysts surveyed by Bloomberg News. Officials have been united in voting to leave policy unchanged since Governor Mark Carney’s first Monetary Policy Committee meeting in July 2013. The BOE will update its economic forecasts next week while a separate report will show unemployment fell in the three months through June, according to a separate survey of economists.

“The next big U.K.-related point of interest is going to be the labor market data next week and the Bank of England’s inflation report,” said Daragh Maher, a foreign-exchange strategist at HSBC Holdings Plc in London. Sterling’s direction is “broadly moving sideways but if we get better U.S. numbers out over the next couple of weeks, that’s going to be more of a driver - how much dollar enthusiasm there is out there,” he said.

The pound was little changed at $1.6844 as of 4:07 p.m. London time after touching $1.6814 on Aug. 4, matching the lowest since June 12. Sterling strengthened 0.2 percent to 79.28 pence per euro.

The pound has weakened 0.2 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. In the past year, it was the best performer, gaining 9.9 percent as investors brought forward bets on the timing of the BOE’s first increase in interest rates since 2007.

Purchase Target

Policy makers also kept their asset-purchase target at 375 billion pounds, as predicted by all 35 economists in a separate Bloomberg survey. The benchmark interest rate has been at 0.5 percent since March 2009.

With economists unanimously predicting no change in rates, “all the attention will be on whether or not there is a split vote” among committee members, Daniel Vernazza, an economist at UniCredit SpA in London, wrote in a note dated Aug. 6. “Our expectation is that one or two members will vote for a hike, with a sizable risk that no one does.”

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting U.K. borrowing costs will increase by a full 25 basis points by March. Barclays Plc and Deutsche Bank AG are among institutions that forecast the central bank will increase interest rates in the fourth quarter, according to data compiled by Bloomberg.

Data Dependent

“As the economy normalizes, Bank Rate will need to start to rise in order to achieve the inflation target,” Carney said in a speech in Glasgow, Scotland, on July 23. “But the MPC has no pre-set course and the timing of any increases in interest rates will be determined by the data.”

The pound slid and U.K. bonds gained yesterday after reports showing industrial and manufacturing output rose less in June than economists forecast boosted concern the U.K.’s economy is falling short of analysts’ estimates.

The 10-year gilt yield was little changed at 2.50 percent after touching 2.49 percent, the lowest since August 2013. The price of the 2.25 percent bond due in September 2023 was 97.995.

Gilts returned 5.7 percent this year through yesterday, Bloomberg World Bond Indexes show. That compares with a gain of 6 percent for German securities and 3.6 percent for Treasuries.

To contact the reporters on this story: Alexa Liautaud in London at aliautaud@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins


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