Sterling slides to a week low after Bank of England left rates unchanged

PUBLISHED : Friday, 12 May, 2017, 1:11am
UPDATED : Friday, 12 May, 2017, 1:11am

Sterling fell to a one-week low against the dollar on Thursday after the Bank of England’s inflation report showed interest rates were unlikely to rise within the next two years.

Although the BoE said it might need to raise rates before the late 2019 date market pricing indicated, that was nine months later than its February forecasts showed.

The BoE’s Monetary Policy Committee (MPC) voted 7-1 in favour of keeping interest rates on hold at their record-low 0.25 per cent this month, quashing some bets that a second official would also support a rise.

Sterling fell as much as 0.7 per cent to a one-week low US$1.2849 following the Bank’s release. It was last down half a per cent on the day at US$1.2882.

It also hit the day’s low of 84.51 pence per euro, before steadying at 84.36 pence per euro, half a per cent lower on the day.

“I appreciate that there was some mild speculation that it (the vote) could be 6-2 rather than 7-1,” said Simon Derrick, head of markets strategy at Bank of New York Mellon, adding that he was surprised at the sell-off in the pound.

“Maybe the only other reasonable explanation of it (the move) is we’ve been trading close to that big level at US$1.30. Perhaps that combination of no big surprises from the BoE maybe just led to a little bit of profit taking.”

Apart from the votes remaining unchanged, the Bank’s trimming of its UK growth forecasts hit the pound, said Peter Ashton, managing director at Eiger FX. “But a more positive economic forecast in the longer term could see sterling bounce back once markets drill down into the detail,” he said.

Earlier on Thursday, data showing weaker-than-expected industrial output and a widening of Britain’s trade gap also weighed on sterling, which has struggled to break past the “psychological” US$1.30 mark this week.

BoE Governor Mark Carney said sterling’s appreciation since Prime Minister Theresa May announced a June 8 snap election last month possibly reflected market expectations of a more orderly Brexit. Carney also said volatility is quite low in financial markets, but closer to historical averages in sterling markets.

Diminishing global market volatility and a lack of new developments on Britain’s talks on leaving the European Union have kept the pound steady since it gained 3 per cent after May’s announcement.