Pound Slumps After Bank of England Raises Rates

(Bloomberg) -- The pound slumped after the Bank of England’s hawkish rhetoric failed to convince markets of a brighter economic outlook.

In a surprisingly unanimous decision, the BOE’s Monetary Policy Committee raised the benchmark interest rate by 25 basis points to 0.75 percent and flagged further increases. Still, sterling fell to its lowest since July 20 as the central bank chief signaled the pace of further hikes would be gradual and markets questioned the rationale for tighter policy when the U.K.’s exit from the European Union is still mired in uncertainty.

Pound Slumps After Bank of England Raises Rates

“It is very difficult for the BOE to convince the market that it may hike rates again when everyone knows there hasn’t yet been a Brexit deal,” said Jane Foley, a senior currency strategist with Rabobank International. “It seems unlikely that the MPC will be willing to hike again in the coming months. Sterling remains very vulnerable to political uncertainty.”

Sterling failed to shake off its blues as money markets continued to price in the next rate increase as late as September 2019 and policy makers said they saw inflation remaining contained within the 2 percent target through 2021.

The pound slid as much as 0.9 percent to $1.3016. While strategists in the Bloomberg currency survey still see the U.K. currency ending the year higher at $1.3400, their median forecast has fallen from $1.4300 call as recently as April. The yield on benchmark 10-year gilts was two basis points lower at 1.36 percent.

“Some fairly optimistic assessments in there -- but this is all with rose-tinted glasses of a smooth Brexit adjustment,” said Viraj Patel, strategist at ING Groep NV. “That is currently not a view that everyone in the market shares -- so expect limited follow-through. The short-term political troubles for the pound remain.”

BOE projections and main points:

  • Central bank predicts inflation slipping to 2.2 percent in 2019 from an average of 2.3 percent this year before settling at the goal in 2020
  • Carney says there is evidence that the U.K. is recovering from first-quarter weakness
  • Carney says BOE is ready for any potential Brexit outcome
  • Neutral rate is now much lower than it was before the crisis and rate increases will be limited and gradual
  • Says neutral rate will rise gradually and policy “needs to walk, not run, to stand still”

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