Forex News – Sterling tumbles as BoE keeps rates on hold, cuts growth forecasts
The Bank of England decided to keep rates unchanged at all-time lows as it completed its two-day meeting today. Despite the decision not deviating from expectations, sterling suffered sizable losses relative to majors including the dollar and the euro as the Bank lowered its forecasts for growth in the current and following years. The pound’s decline continued as Mark Carney, the central bank’s Governor, appeared before the press after the decision announcement. Overall, the Bank’s decision, minutes and language used in its quarterly Inflation Report lacked the hawkish tone that led to rising market expectations for an interest rate hike to be delivered this year.
More specifically, the BoE’s Monetary Policy Committee (MPC) voted by 6-2 to maintain its benchmark interest rate at the record low of 0.25%. This compares with a 5-3 split during the June meeting when the Bank came the closest to voting for a rate hike since 2007. Additionally, the MPC was unanimous at keeping the total stock of government bonds to be purchased as part of its stimulus program at 435 billion pounds and the respective number for corporate bonds at 10bn pounds.
Furthermore, the Bank cut its annual GDP forecasts for 2017 and 2018 to 1.7% and 1.6% respectively from the previous 1.9% and 1.7%. Inflation projections were slightly revised upwards for the current year to 2.7% on an annual basis from 2.6% before, while the central bank’s expectations for annual inflation in 2018 remain at 2.6%. Standing out was the considerable reduction in wage growth forecasts to 3.0% annually for 2018 from 3.5% just two months ago. This comes at a time when UK households are already seeing their purchasing power diminish as a result of the weakening sterling following last year’s vote to exit the EU blog of nations.
The Bank and its Governor in the press conference that followed, were clear that businesses and households should not expect borrowing costs to stay at their record low levels for much longer. However, the many caveats Carney gave – revolving in large part around Brexit-related uncertainty – in order for policy tightening to get underway, led forex market participants to place little emphasis on those comments.
Pound/dollar immediately fell upon the decision announcement and extended its losses as Governor Carney was talking, falling to as low 1.3111. The pair was trading at 1.3234 previously, while earlier in the day it hit a fresh near 11-month high of 1.3266. It was last 0.6% down on the day. Euro/pound broke above the 0.90 handle, reaching as high as 0.9042, a nine-month high. It traded at 0.8942 before the news. It was last up by 0.8% and close to the day’s high.
On the Brexit front, Carney said that uncertainty over the UK-EU future relationship is weighing on business investment and household spending, adding that the level of investment in the economy is currently expected to be 20% lower than the Bank anticipated before the vote to leave the EU. Still the BoE is basing its long-term forecasts under a “smooth” Brexit assumption according to Carney. The buildup in consumer borrowing also received attention as it has risen to levels last seen before the 2008 financial crisis – this makes raising rates even more difficult as borrowers are already struggling to meet obligations in an environment of ultra-low interest rates.
Ian McCafferty and Michael Saunders were the two MPC members that dissented in favor of a 25 basis points rate hike, expressing concerns over rising inflation. Kristin Forbes, the third member voting in favor of a rate rise during the June meeting, has since departed after completing her term as an MPC voting member. The BoE next meets on September 14.