Pound falls as Bank of England plays down rate rise

 

Pound Sterling v US Dollar

Last Updated at 22 Aug 2014, 18:40 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 Aug 2014, 11:36 ET *Chart shows local time FTSE 100 intraday chart
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Top winner and loser

Royal Mail

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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
    -1

    Comment number 335.

    Ultimately we need to stop the expansion of money supply and peg the value of pound to something physical (whether gold or silver) and make all these notes exchangable once again.

  • rate this
    +3

    Comment number 334.

    329.Sally says no to the Nanny State
    "I've put my savings into 1oz Silver Kookaburras."
    ==

    You're a gambler like the rest then. What you've actually done is put your savings into the *value* of Ag, and that's as intangible as anything else.

  • rate this
    +6

    Comment number 333.

    @322 .essiritussantos
    Yes they are both singing from the same hymn sheet,
    We have flat earth economics,we have flat earth economics & so say all of us
    /
    We are in agreement again.
    Sadly, there is little chance of Carney standing out on a limb.
    He is much more likely to go along with whatever the consensus is amongst central bankers no matter how antediluvian it may be.

  • rate this
    +3

    Comment number 332.

    here we go.... the governments borrowing is a disgrace and they are going to expect us to foot the bill..... here comes proper austerity.. hang on to your hats or get your guns out for the forthcoming riots

  • rate this
    +1

    Comment number 331.

    319 Virginia

    'can't eat diamonds, and they don't clean you up if you're incontinent in your old age'

    True. But what's your point? You can't eat fivers or million pound notes either. But you might get somebody to sell you some food for diamonds (or silver) as opposed to a 1,000,000,000,000,000 pound note.

    Comrade Bob's paradise shows you what happens when you print cash.

  • rate this
    +1

    Comment number 330.

    I know it's hardly a concern as few can afford it but this usually happens just in time for family holiday season. You get more Euros to the Pound when fewer people are jetting off. Us Brits even get ripped off abroad!

    Also, I own a (mortgaged) house and would welcome a price correction. We have a baby on the way and need a bigger place but the jump in price for an extra bedroom is astounding.

  • rate this
    0

    Comment number 329.

    312.Jaw dropping
    Voted up
    Sound advice. During the also artificially suppressed prices of gold & silver, I've put my savings into 1oz Silver Kookaburras.

    The basic rule is, don't hold something in any great quantity that they can run off their printing presses.

    I never have more than £5k in my account. Everything is squirreled away, as you suggest: into socialist proof, tangible things

  • rate this
    +2

    Comment number 328.

    Greed is the problem, not interest rates.

  • rate this
    +1

    Comment number 327.

    What Carney and co have to realise is that they are playing with the livelihoods of the working man and woman.

    And the mechanisms they are using merely encourage bankers and other spivs that leech off us all.

    Who are our representatives actually representing?
    Particularly when it all goes wrong and we have to bail the whole lot out anyway.

  • rate this
    +3

    Comment number 326.

    The real recovery will only happen when the banks AND the govt coffers are recovered.

    I don't see that happening for several mores years. And, who knows what might happen after the next GE 2015?

  • rate this
    +2

    Comment number 325.

    BOE statements always have the same effect on currency markets to the £ value. Was it Marks's intention to state a global situation or that the UK would keep interest rate low regardless!! It certainly dived sterling down indicating most economists are wrong in such expectations & the BOE.s position & future policy for the £.Just perhaps making a statement to have the desired effect on Stirling

  • rate this
    0

    Comment number 324.

    Considering it costs the Royal Mint about 5p to make one £1 coin, I think $1.51 to the pound isn't that bad.

  • Comment number 323.

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

  • rate this
    0

    Comment number 322.

    315 plotinus
    Yes they are both singing from the same hymn sheet,
    We have flat earth economics,we have flat earth economics & so say all of us

  • rate this
    +62

    Comment number 321.

    Remind me why we're still trying quantitative easing when it hasn't worked for the last 5 years?

  • rate this
    +11

    Comment number 320.

    I still think that people are living in total ignorance of what has, and still is, happening in the economics of these last few decades and all that has gone on in the last decade in particular.

    Why people cannot just accept the fact that property prices have gone too high and need to be rebalanced, as well as some other basic economic aspects of our economy just eludes me.
    It also eludes them ;)

  • rate this
    +2

    Comment number 319.

    jawdropping etc... can't eat diamonds, and they don't clean you up if you're incontinent in your old age, and a house is for living in - when it started being the bank of Mr & Mrs Greedy the rot set in.

  • rate this
    +8

    Comment number 318.

    The banks do not need savers anymore, they get cheap money at low interest from the B.O.E. They hold our money for safe keeping, to prop up their balance sheets. Most of the bank assets are loans to home owners and business, this why thy will not let the housing bubble burst because they will go bust. It's all about the banks not the people. The BOE IS PROTECTING THE BANKS...by conning the people.

  • rate this
    -2

    Comment number 317.

    Average 5 year fixed is now 4%.

    What rate do you think us borrowers should be paying? Pick a number that would satisfy you that we are getting enough pain to cheer you renters and retirees up a bit.

  • rate this
    0

    Comment number 316.

    306. Alan Marr
    You don't learn. The anti-immigrant feeling is so high that my wife - from Spain - and I, have been insulted in the street for speaking a foreign language - Spanish - although my Spanish is not so good.
    I think I should demand an apology from Nigel Farage.
    Only - 5 for your comment?
    did in 2004. Britain is a service economy and we continually need new people to keep it going

 

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