Pound falls as Bank of England plays down rate rise

 

Pound Sterling v US Dollar

Last Updated at 22 Jul 2014, 06:16 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 22 Jul 2014, 06:05 ET *Chart shows local time FTSE 100 intraday chart
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Top winner and loser

ARM Holdings

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Tesco

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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.”

End Quote

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
    0

    Comment number 315.

    Carney's statement makes sense when you parse it with Draghi's statement.
    They are both singing from the same hymnsheet.
    It was a concerted action.

  • rate this
    +1

    Comment number 314.

    306. Alan Marr
    "The economy will recover in January when we get a new wave of immigrants they will help stimulate the economy like the Poles and others did in 2004."

    Are you suggesting we buy into tripe ahead of the increased demand when the Romanians get here? Wish I'd bought lard before the Poles arrived, not getting caught out again.

  • rate this
    +2

    Comment number 313.

    Lower pound brings greater prospects for export.

    Lower pound drives prices up when importing.

    Do you want jobs? or low priced goods?

    Remember you normally need a job to buy goods.

  • rate this
    -2

    Comment number 312.

    302. Sally says no to the Nanny State

    I agree 100 % however I urge people to be wary of gold on its own ! liquidise your assets for sure. As the labour party and its supporter will be hungry for you money. I suggest as I do. buy high end watches rolex daytona are excellent. Gibson Les Paul 1959 or prior also good. and of course diamonds ! light weight and easy to transport ! Socialist proof !

  • rate this
    +1

    Comment number 311.

    @ 278 I was like 10 when labour got elected not sure how anything to with them is my fault? I wasn't labelling anyone anything mostly eating cake and going to school.

  • rate this
    +1

    Comment number 310.

    Pound?....With the prices as they now are I tend to think more in multiples of £5 & £10 because 'pounds' seem to be becoming a replacement for the penny! The whole situation would be a lot better if the truth were told & property realised at it's actual value rather than the grossly over inflated value that's been put on it!

  • rate this
    +6

    Comment number 309.

    I like the idea of forward guidance.

    It should reduce volatility in the markets, which benefits speculators/traders but is bad for genuine investors (who invest in things for the longer term) and also bad for business, since each company wants to stabilise their share price to something that genuinely reflect the worth of their business.

  • rate this
    0

    Comment number 308.

    OMG stop the bus. A whole 1.5 cents. The sky is falling!

  • rate this
    0

    Comment number 307.

    why can't central bankers keep thier mouths shut. Last week Bernanke on QE and now the new 'Canadian' Governor of the B of E. So what if the markets are wrong in their speculation by feeling the need to say something volatility results which hurts the wider public not the market makers who win either way. The B of E should be under political control not out sourced to a foreign national.

  • rate this
    -27

    Comment number 306.

    The economy will recover in January when we get a new wave of immigrants they will help stimulate the economy like the Poles and others
    did in 2004. Britain is a service economy and we continually need new people to keep it going

  • rate this
    +2

    Comment number 305.

    Lower Sterling value: as UK is net importer it is driver up of inflation, such as fuel, it makes exporters more competitive, but I agree with the comment this is hype, "news" with a less than 1% change? Its like "news" of when the economy is 99.7% the same as last year. The real info is not new, long-term the UK has to address its workforce, education, work ethic, manufacturing, it has MAKE+sell.

  • rate this
    -1

    Comment number 304.

    Fractional Reserve Banking is legalised fraud that allows Central banks to create money from nothing. They make up the money when you buy your house using your debt as collateral allowing them make up even more money to lend to others. It’s estimated that 95% of all money is electronic. We are enslaved to debt which is a more insidious way of controlling people than any feudal/dictator system.

  • rate this
    0

    Comment number 303.

    @276.

    'Never a truer word spoken,than that spoken in jest.'

    I take it U WERE speaking in jest,cos from what I can see nothing about the spectacular failure of these greedy,insouciant,city suits some 4-5 years ago,& the dire consequences of their unaccountable actions we're all living with now, is in the remotest extent funny.The pity is that as yet they've not produced any credible alternatives.

  • rate this
    -7

    Comment number 302.

    Thanks to central bank fiat currency printing (debasing), fractional reserve banking (fraud), and suppressed interest rates (shameless price fixing) will catch up with us. We'll reap as we sow. Every fraudulent economy has collapsed, so will ours.

    "The gold standard... will return with the force and inevitability of natural law, for it is the money of freedom and honesty."
    ~Murray M. Rothbard

  • rate this
    +3

    Comment number 301.

    94.danthemechanic27

    "can someone explain why credit card rates are typically 18% per annum when the B o E rate is 0.5%"

    ===

    Hi dan: would you also like someone to explain why, despite being short and not handsome, Bernie Ecclestone had a tall attractive wife?

    You don't mean that, really, do you?

  • rate this
    +13

    Comment number 300.

    Allegedly the housing market is picking up. Why? Because money is too cheap. Unless the bank allows at least a moderate rise in interest rates, we are heading for another housing bubble and bust, even before the last one has deflated. How many times does this bad thing have to happen before we learn the lesson?

  • rate this
    +1

    Comment number 299.

    Printing cash and pouring it into the banks to keep them solvent, hmm that's their answer to the biggest and longest slump in consumer demand since the 1930`s ? Every western economy is in the same boat, banks take the cash and are stashing it in bank vaults, its not getting out in to the real economy. Needs to go to consumers so they start spending
    The era of high spending consumers is finished.

  • rate this
    +1

    Comment number 298.

    @259.Hugo Grotius
    "Good news for house owners"

    While house prices are already out of reach of most people, and interest rates are going UP making mortgages less affordable, on what planet or plane of existance is this news good for house owners?

    Unless you're being sarcastic, in which case with both fingers I apologise.

  • rate this
    +3

    Comment number 297.

    The only rates of interest to rise will be mortgage interest, after all that has happened the banks are still in a win - win situation!

  • Comment number 296.

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

 

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