Pound falls as Bank of England plays down rate rise

 

Pound Sterling v US Dollar

Last Updated at 20 Aug 2014, 07:16 ET *Chart shows local time GBP:USD intraday chart
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The pound has fallen sharply after the Bank of England warned that markets were wrong to assume that it would start raising interest rates soon.

Sterling immediately dropped a cent and a half against the dollar to $1.5141.

It came as the Bank held interest rates at 0.5% and kept its quantitative easing programme (QE) unchanged.

The decisions were made at the first meeting of the Bank's Monetary Policy Committee since Mark Carney took over as governor from Sir Mervyn King.

Share prices rallied in London in anticipation of the further continuation of cheap borrowing costs.

The FTSE 100 index jumped 50 points on the news, and later gained a further lift from a promise by the European Central Bank to keep eurozone rates low, taking it to 3% up for the day.

The unusual statement by the Bank's Monetary Policy Committee (MPC) comes as the economy shows signs of recovery, with several industry surveys pointing to rising business optimism.

Earlier on Thursday the Halifax reported that house prices across the UK were 3.7% higher in the three months to June than a year ago, adding to evidence that the property market is on the rebound, particularly in the South East.

'Not warranted'

The MPC said that the recovery "remains weak by historical standards and a degree of slack is expected to persist for some time".

The positive developments in the economy have also been tempered by a sharp rise on global markets in the long-term cost of borrowing - something that has caught central banks worldwide by surprise.

In light of the market movements, "the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy," the MPC said.

FTSE 100 Index

Last Updated at 20 Aug 2014, 07:07 ET *Chart shows local time FTSE 100 intraday chart
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The Bank has held short-term interest rates at their current historic low level since March 2009.

However, last month markets brought forward their expectations for when interest rates in the UK - as well as in the US and other major economies - would start rising again.

It came after a statement from the US Federal Reserve laying out a timetable for withdrawing its own QE programme was taken as a signal by markets that the era of cheap money was coming to an end, and sent stock markets, commodity and bond prices lower worldwide.

The Bank's statement immediately scaled back those expectations in the sterling money markets.

Even so, the Bank is still expected by markets to raise interest rates by a quarter-point within the next 12 months. Back in April, markets did not expect any change in monetary policy over the coming year or more.

With interest rates expected to remain low for longer, the pound became less attractive on currency markets, sending sterling lower.

The pound also fell sharply against the euro, before rebounding an hour and a half later as the European Central Bank committed to maintaining its interest rates at or below their current level for an "extended period of time", sending the euro lower against all currencies.

Forward guidance?

The Bank of England's move may also herald a change in style with the change of governor.

Start Quote

Today the Bank of England and the European Central Bank tried to declare their independence from the US central bank.”

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Mark Carney, who has just taken over, is known from his time heading Canada's central bank for favouring "forward guidance" - providing markets with explicit statements about the Bank's future plans, in order to manipulate longer-term interest rates.

The MPC has been asked by the Chancellor George Osborne to make the case for forward guidance in a report to be delivered alongside the August inflation report.

The Bank said the analysis "would have an important bearing on the committee's policy discussions in August".

"This is close to the MPC issuing forward guidance in July, instead of waiting until August," said David Tinsley, UK economist at BNP Paribas.

"It is clear from the statement that they are looking to forward guidance as a key tool in massaging yields and expected Bank Rate lower.

"It is newsworthy in itself that despite better data, the committee as a whole agreed this common view. It suggests at this early stage that Mr Carney is both dovish leaning and very much in charge."

Voting split

Although the no change in policy was widely anticipated by markets, there is likely to be keener market interest than usual in the voting pattern at Thursday's meeting, when minutes are published on 17 July.

The MPC has been split in recent months over whether to increase QE from its current level of £375bn, and the outgoing governor, Sir Mervyn, was among the minority voting in favour of an increase.

It is unclear which way Mr Carney is likely to have voted on the issue, particularly in light of the stronger economic recovery, as well as the recent market jitters over future interest rates.

Further complicating the picture, inflation in the UK remains doggedly high - consumer prices rose 2.7% in May, well above the Bank's 2% target.

Inflation has been above target since 2009, and has been stuck in the 2%-3% range for the past year, having previously fallen from 5%.

The Bank has thus far turned a blind eye to the inflation overshoot - something that is not expected to change under Mr Carney.

Wage rises have consistently failed to keep up with rising shop prices, and this has undermined the purchasing power of households and dampened consumer spending.

 

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  • rate this
    +9

    Comment number 135.

    Anybody else sense another financial crash looming?? Feels like the sword of Damocles is over us and no matter how much we are told that the economy is back on track, it isn't really! Won't take much to plunge us back into recession.

  • rate this
    +2

    Comment number 134.

    The problem with the UK economy is that it's very much centred on what the SE is doing. The economy there is only a microcosm of the whole country, yet that's all we hear about. In the NW businesses are closing, unemployment is high and I doubt any honest business would claim to be 'optimistic'. At the same time, talking up the national economy when its not ready for it has drastic consequences.

  • rate this
    +19

    Comment number 133.

    Savings and pensions get hit again. They aren't worth the paper they are written on.

    I've followed "prudence" all my working career so much so that for every £25k in my pension pot, I will get an annual pension of around £800.

    I'd have been better off spending it all in my youth on fast cars and slow women!

  • rate this
    +46

    Comment number 132.

    What kind of a numbskull would look for the housing market to get us out of the mess that it caused in the first place. All the QE will come back to haunt us as is storing inflation in the pipeline

  • rate this
    +2

    Comment number 131.

    Get the offshore oligarchs and non-doms to pay tax. It is not fair that they get to spend tax-free fortunes in a country they didn't build.

    The rule has become that whenever there is something desirable, the oligarchs park their tax-free fortunes in it, egged on by government. This is terrifying for everyone else.

    At least sterling dropping makes oligarchs' investments in the UK worth less!

  • rate this
    +6

    Comment number 130.

    The price of our exports have become cheaper! Great news for exporters!

    Er..what exactly does Britain Export abroad any more? Coal? Iron? Steel products? Gas? Oil? Cars?

    The price of IMPORTS has also gone up. Meaning higher costs for the UK consumer, including your overseas holiday.

    Can we in Britain learn from the Egyptians - and eject this "no-mandate" coalition?

  • rate this
    +3

    Comment number 129.

    Every other country has accepted that the HP bubble needs deflating for the economy to rebuild, but not our Gov
    Short term sticking plasters again
    They know they wont get voted in next election so they’re hoping the financial time bomb explodes on some one else’s watch
    Other countries will be way ahead of us clambering out of the recession

  • rate this
    +10

    Comment number 128.

    Everyone knows we all need higher interest rates. Stop pandering to those that made this problem with low rates even before they started dropping them. Cheap money is a bad thing, leading to reckless borrowing, personally & corporately. They end up stealing by not paying it all back. This knocks on to others, innocent others, savers, as most drastically shown in Cyprus and EU plans to repeat it.

  • Comment number 127.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +1

    Comment number 126.

    If interest rates go up there will be great pressure for wages to rise as well - given that many people haven't had any form of pay rise - not even cost of living - since 2009 and are on variable or tracker mortgages.

    I would rather pensioners were given free tv licences and a rise in their pension above the cost of living than that we had inflationary pressures which will hit small firms hard

  • rate this
    +11

    Comment number 125.

    So, looking at the graph, the Pound was trading at about 1.515 yesterday until the city spivs started betting on it, pushing its value up a little for a short while, and now it is back at 1.51.
    A change of 0.005.
    What exactly is the story here?

  • rate this
    -27

    Comment number 124.

    It's funny how HYS attracts "experts" bashing any financial policy from economists whatever it is, yet as soon as some pixie dust environmentalist comes on preaching carbon dioxide worship the disciples fall over themselves to agree. Bonkers! I like the new governer's approach.

  • rate this
    +1

    Comment number 123.

    Knee jerk reactions from fickle markets. Quelle surprise.

    It's interesting the hear from many commentators that believe their prudence is now being penalized.

    Actually, many of you were beneficiaries of 'good times', you were over compensated and now you must pay some back.

    Face it, your still better off than many youngsters who won't get the cheap houses and good long term jobs you got.

  • rate this
    +6

    Comment number 122.

    @100.Old Mr Boston


    Maybe you should've read the small print.

    The value of investments can go down as well as up.

  • rate this
    +1

    Comment number 121.

    Someone should make a study how much the UK economy actually depends on the housing market that people constantly buy/sell/move into a new property. I have the impression it is massive! Otherwise I can not understand why they keep on firing it up the only reason I can think of as soon as it comes to a standstill the whole UK economy will collapse in one single flup.

  • rate this
    0

    Comment number 120.

    Any increase in the interest hit would hit borrowers, and we are talking mortgage holders, hardest. A half percent increase probably wouldn't do a great load but a 1% increase would. People are living on the brink and that would see repossessions go up again and government borrowing costs would rise. The country's in record debt already. We are stuck between a rock and a hard place.

  • rate this
    0

    Comment number 119.

    It's time to celebrate;

    house prices have gone up
    shares in house builders have gone up

    cheap borrow in here to stay......house prices carry on rising

    Just remembered wages have dropped to their lowest levels over last 10 years AND there is a property bubble which continues to grow

    Hate to think if our kids are ever going to get on the property ladder.

  • rate this
    +2

    Comment number 118.

    These people that make up the "markets" earn more in a year than most of us will take home in a life time.....



    ....ad what do they do to reserve such rich rewards.....????




    Yup, they play with little green figures on computer screens, either not realising or not caring, that their actions impact (almost always negatively....) on us real people out here in the real world.....

  • rate this
    +6

    Comment number 117.

    For all the flippant commentators on HYS, I would just let you know that the current interest rate policy compared to 5 years ago, in my business, has been the equivalent of 2 jobs saved. I appreciate that it's rough on savers, but I am happy that 2 families have benefited directly, along with tens of thousands of pounds benefit to the Exchequer.

  • rate this
    +3

    Comment number 116.

    The record low interest rates have not been passed on to borrowers. For businesses there is no point on investing by borrowing money at 5%(or more) when a ROI of about 2% can be expected. For us savers, we have been hammered by low interest rates and high (real world) inflation. QE has helped no one expect the banks; long term economic recovery cannot occur by simply printing money.

 

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