Pound Gains as Traders Cut Bets on Prospect of Subzero BOE Rates
Pound Gains as BOE Maintains Stimulus, Signals Rates to Stay Low
(Bloomberg) --
The pound advanced and bets on more interest-rate cuts eased after Bank of England officials highlighted the potential drawbacks of negative interest rates.
The currency climbed to the highest since March and money markets now see the BOE lowering rates to 0% in September next year, pushed back from May before the decision.
“The BOE have re-iterated that for now they will stay away from sub-zero rates,” said James Athey, a money manager at Aberdeen Standard Investments. “At the margin, that’s enough for a little pop in the pound, before moves go back to being all about the dollar.”
The central bank kept rates and its bond-purchasing program unchanged and said it will slow its pace of asset purchases to 4.4 billion pounds ($5.8 billion) a week starting Aug. 11, from 6.9 billion pounds. That initially put pressure on gilts, before yields steadied.
Sterling had its strongest July since 1990, thanks to a weakening dollar. It has made up for its losses since Covid-19 led to lockdowns in March, when the currency nosedived to its lowest level in 35 years and policy makers rushed to slash interest rates.
The currency rose 0.4% to $1.3172, after touching the highest since March 9. Against the euro, it climbed 0.5% to 90.01 pence.
Low for Long
BOE officials said the economy is unlikely to fully recover before the end of 2021, slightly later than the previous scenario. And they stressed that it won’t tighten monetary policy anytime soon.
“I do not believe that the pound gains, specifically against the euro, will be sustainable because the BOE is basically signaling that it will keep interest rates low for longer than it did in the last cycle,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG.
Even with the outlook uncertain for rate moves, economists expect the central bank to take further action, given the government’s help for paying workers’ wages is set to run out, unemployment is forecast to climb and the virus is still causing lockdowns in parts of the country.
A survey by Bloomberg expects the central bank’s asset-purchase target to be increased again by the end of this year. That program soaked up some of the government’s extra borrowing to fund its crisis response, helping to push short-term bond yields to record lows recently.
Short sterling futures, which are tied to the three-month funding rate, fell across all maturities as investors pared bets on the BOE easing interest rates.
What Bloomberg Intelligence says:
“The U.K. now has a fuzzy policy rate floor as negative rates policy is in the toolbox and under review. Uncertainty around the outlook should keep markets pricing negative rates. The slowing of QE risks long-end gilts needing some discount for investors heading into heavy supply in September.”
-- Tanvir Sandhu, Chief Global Derivatives Strategist
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