Pound Slides as BOE Rate Hike Looks to Be the Last for Now

(Bloomberg) -- The pound slumped as the Bank of England raised interest rates for the first time in a decade and signaled that another increase isn’t imminent.

Sterling fell for a second day against the dollar, 10-year gilts rallied and the FTSE-100 Index extended its gains. The BOE’s Monetary Policy Committee voted 7-2 to raise the bank rate by 25 basis points to 0.50 percent, in line with economists’ expectations ahead of the decision. 

Money markets pushed back pricing for the next rate increase to November 2018 from August 2018 prior to the decision after the central bank omitted language from its previous statements saying that more tightening could be needed than the market expects. With another hike now looking remote, it could be news on Brexit that drives the pound, according to Mark Nash, head of global bonds at Old Mutual Global Investors.

Pound Slides as BOE Rate Hike Looks to Be the Last for Now

“This is pretty timid from the BOE and the most dovish they could get away with,” he said, noting that members of the policy committee had forced themselves into an interest-rate increase to keep the bank’s credibility. “The pound will be an outlier now, until Brexit is sorted."

The pound traded 1 percent lower at $1.3111 as of 1:40 p.m. in London, and touched $1.3085 earlier. The yield on two-year bonds dropped seven basis points to 0.42 percent, while the 10-year rate fell five basis points to 1.30 percent. One-month implied volatility on the pound-dollar pair declined five basis points to 7.88 percent. The FTSE 100 extended earlier gains, climbing 0.6 percent.

Pound Slides as BOE Rate Hike Looks to Be the Last for Now

The BOE is tightening policy in very different circumstances from 2007, when it raised rates amid the fastest economic expansion since the start of the decade. This time around, growth has slowed and the central bank is trying to quell annual inflation, which at 3 percent is running a full percentage point above target.

Even with the pound’s recent recovery, the currency is more than 11 percent lower against the dollar from levels before last year’s Brexit referendum. Jordan Rochester, a strategist at Nomura International Plc, also sees Brexit coming back into focus for pound traders.

“Following the BOE monetary policy committee’s decision, the market focus will remain on developments in data, Brexit talks and what comes of Philip Hammond’s autumn budget,” said Rochester. “Any loosening of fiscal policy will be a market surprise and will lead to higher yields, a more hawkish BOE and therefore a stronger sterling with it.”

©2017 Bloomberg L.P.