Pound falls as Bank of England plays down rate rise

 

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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

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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
    +4

    Comment number 355.

    319.Virginia Cath "..a house is for living in"
    I always remember the advice Roz, a member of staff at a company that I had just started work at, gave me during one lunch hour.
    She said it was best to buy and that I would be fine, so long as I remembered that a house was for living in - and not to think of it as an investment. If I made a profit when it came time to sell then it was just a bonus.

  • rate this
    +4

    Comment number 354.

    Inflation destroys jobs and savings more than anything else, and is fuelled by rising interest rates. Only we oldies can remember when we were paying 12% or more interest on our mortgage. That, if it happened again, would certainly bring house prices down. The foreclosures would guarantee that.

  • rate this
    +1

    Comment number 353.

    Not sure about this tangible, intangible thing.

    If I have to live in a cardboard box where will I put the intangibles?

    Maybe thats the answer, Should I put any spare cash into carboard boxes?

  • rate this
    +3

    Comment number 352.

    26. nutgone

    The whole economic ethos has been turned upside down by this policy. The prudent are being punished and the profligate are being rewarded.

    =

    And Gordon Brown is a prudent economic genius! It is clearer and clearer as time goes on what fab job he did!

  • rate this
    -1

    Comment number 351.

    Slowly but surely they are running out of ammunition to keep the GBP down and simultaneously pump growth. Interest rates are going up sooner than UK would like to admit. GBP is a good one way bet.

  • rate this
    +3

    Comment number 350.

    The message from our crooked financial establishment appears to be that this ponsi housing scheme is the only place to protect your savings. This kind of madness can only end badly.

  • rate this
    +6

    Comment number 349.

    As a rich minor nobleman I don't really find that this affects me.

  • rate this
    0

    Comment number 348.

    342, phil sayers, that's because the City ie.e Financial Institutions contribute almost a quarter of the govts income/revenue. If we didn't rely heavily on the City for income, the story might have been different. Changes are being made, hopefuuly but it will take a while to see the effects, I think.

  • rate this
    +3

    Comment number 347.

    Return on capital has been diminished by the recession which has meant that those with cash and wanting to lend it, can only secure a low return as the use of the capital in business and industry is not very profitable. Only when there is a recovery in profitability will it be possible to pay investors more in interest. However the very low rates of interest, hardly beating inflation is a problem.

  • rate this
    0

    Comment number 346.

    319. Virginia Cath


    Can I then not pay to have my backside clean ( privately ) rather than have your Socialists steal everything to shove me in a run down flea-pit to spend my last days spoon-fed slop by indolent militant staff who could;nt care less Council workers ? who's greed is legendary ? I will look after myself thank you very much, now back to the socialist worker please

  • rate this
    0

    Comment number 345.

    275.teh_senaus
    100% correct. We want cheaper prices in every product, except homes it seems. They are re-inflating a property bubble, making it more difficult for non-home owners to get a home of their own. They're also creating bubbles in the stock and bond markets.

    When they all inevitably pop, prices won't fall, they'll plummet. The real GFC is coming, soon.

  • rate this
    +6

    Comment number 344.

    So Carney hasn't the guts like the present useless chancellor to do anything about the housing bubble. No big surprise, the value of money will continue to depreciate due to BOE QE read inflation, whilst people continue to struggle with their income being eroded on a daily basis. Absolutely insane!

  • rate this
    +2

    Comment number 343.

    this why thy will not let the housing bubble burst

    This is why they will not let the housing bubble burst (sorry, a bit of key board rage on my last post, 318 !

  • rate this
    +1

    Comment number 342.

    we live at the behest of financial markets. what has actually changed- NOTHING. through rumour, speculation the money markets spin their webs to conjure up a fortune for someone.

  • rate this
    0

    Comment number 341.

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

    I remember when they made a loss! I thought it was a joke at first:

    http://news.bbc.co.uk/1/hi/uk/2335347.stm

  • rate this
    +39

    Comment number 340.

    The system is like a casino and the "house" is the banking system - they always win and the people always lose.

  • rate this
    +4

    Comment number 339.

    320 Tormented
    Why do they not understand
    Maybe because economics is only taught in charity schools,god forbid that the masses should ever understand what is happening

  • rate this
    +12

    Comment number 338.

    Anyone remember why the pound fell 2 cents on February 20th 2013?

    No - me neither.

    This is not news. It's markets doing what markets do.

  • rate this
    0

    Comment number 337.

    Oh Dear, my Mum used to say "never put off till tomorrow, what you can do today".

  • rate this
    0

    Comment number 336.

    Economics is like Financial Astrology. You'd be just a wise to listen to Justin Topper or Mystic Meg. Me? I'm not into all that Hocus Pocus, I just do what the Tea Leaves say....

 

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