Pound falls as Bank of England plays down rate rise

 

Pound Sterling v US Dollar

Last Updated at 18 Sep 2014, 18:00 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 18 Sep 2014, 11:36 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
    +5

    Comment number 375.

    The UK can either continue to print money and suffer the consequences, or reduce spending and try and increase exports (difficult without a strong manufacturing base and ready markets). To have a sound currency, joining the Euro may end up being the UK default position in a number of years. Especially when the eurozone starts to demonstrate efficiencies and the disciplin of fiscal control.

  • rate this
    -1

    Comment number 374.

    Savers - provident hard-working people - matter more than overstretched feckless borrowers and interest rates should go sky-high to compensate them for the fraud of the last few years.

  • rate this
    +1

    Comment number 373.

    316.fercape "..continually need new people to keep it going"
    Yes I agree.

    And so long as we all remember that basically all business, but particularly the housing business, is a bastardised,slanted version of variations of an Economic Bubble/Pyramid/Ponzi scheme - we can keep our feet on the ground.

    For the rest of them, they ignore what is happening around them and get into trouble.

  • rate this
    +1

    Comment number 372.

    What sane person. will loan for a return of 0.5%, yes borrowers will suffer, but positive returns benefits all, not just the indebted

  • rate this
    0

    Comment number 371.

    357.The J Hoovers
    Sancitmonious much?
    Everyone looks for cheaper, and if one can afford tipping at a restaurant, they do. Do you tip at KFC, their staff work hard too. Do you tip the salesman when you buy a computer, TV, shirt, groceries, car that are all offered at a rival store, at 10% cheaper? Are you so rich as to go out of my way to pay the most? And, to tip after?

  • rate this
    0

    Comment number 370.

    Interest rates WILL rise. Good for savers and those with no mortgage (pensioners). It will create more defaults on mortgages which the Government have guaranteed to the tune of £350mn. Who is paying for the this house price inflation and bust? Yes the British tax payer.

    Gideon's plan to boost the economy is just a boost to the repossessions market. Sadly it will be the tax payer repossessing.

  • rate this
    +4

    Comment number 369.

    I understand the sky is also falling - it is the end of days.

    The best way to deal with this is to hold one's hands high in the air and wave them, while running around in small circles, screaming.

  • rate this
    +1

    Comment number 368.

    So we are not changing our interest rates and the pound falls against ALL currencies listed on the BBC money pages. The ECB announces they're not changing theirs either . . so why does the pound drop against the euro (where the eurozone looks sicker almost daily)?

    What am I missing?

  • rate this
    +1

    Comment number 367.

    @317.tonep
    "Average 5 year fixed is now 4%."

    No help. Mortgage typically requires 25% deposit, max 4.5x your earning.

    Median wage 25k max borrow 112k, 28k deposit - 140k total, which will buy you a 1 bed flat if you're lucky. 140k should be buying you a 3bed semi with a garden (an average house) Then what happens when rates rise?

    20yr fixed rate ~5.2%, soon >6% unaffordable!

  • rate this
    +8

    Comment number 366.

    Wake up Britain - Buy to Let is simply for the money men to generate a continuing high rate of return and replace the savings/pension provision which was truly empowering the "working people". Now it has to be artificially maintained to protect the interests of those money men.
    Reality is that all of us should be allowed to buy one family home at a competitive interest rate and scrap buy to let.

  • rate this
    0

    Comment number 365.

    347 Violet Mildred
    You can not extract a profit from a slave,you can only use your slave to extract a greater profit from someone with assets
    That is why no one is investing & their is no confidence in the market

  • rate this
    +4

    Comment number 364.

    A rising housing market - out of synch with the general economy - did for us before, and yet still there are those egging the bubble on again. Take note of those people, and if we all go down again, make sure they pay the price this time

  • rate this
    +2

    Comment number 363.

    If the pound has fallen this would make our exports cheaper and therefore may improve the jobs prospect helping people to find work. The downside is importing goods, oil especially, would mean it would be more expensive. We are in a no win situation, as long as interest on borrowed money both from ourselves and the government does not rise we should be OK as business cannot afford a rate rise.

  • rate this
    +3

    Comment number 362.

    336.squirrel

    Supersticious nonsense. Only sacraficing chickens to our dark lord can truly reveal our fates.

  • rate this
    0

    Comment number 361.

    349. Mankind - count yourself as very lucky & good for you!
    351. paul_anyone, interest rates going up is bad news for Home Owners & Businesses but good news for Savers.

  • rate this
    -1

    Comment number 360.

    334.The J Hoovers Witness
    It is a gamble of sorts. But, with humans choosing only gold and silver (and occasionally copper) as real money for 5,000 years, while fiat currencies have an average life of less than 40 years, I like my odds.

    I disagree with you. I'm pretty sure the .999 fine silver dollar in my hand is more Tangible than the Intangible digital £s my computer screen says I "have".

  • rate this
    +4

    Comment number 359.

    349.Mankind
    6 Minutes ago
    As a rich minor nobleman I don't really find that this affects me.

  • rate this
    +1

    Comment number 358.

    When we have a privately controlled, debt-based money supply, when the people suffer and our taxes are going into the pockets of the wealthy banking elite to pay the interest on the national debt then we have a problem.

    http://www.positivemoney.org

    Ever increasing house prices doesn't benefit anyone apart from the 0.00001%!

  • rate this
    -1

    Comment number 357.

    345.Sally says no to the Nanny State

    "We want cheaper prices in every product"

    ===

    Not really. If I go for a meal in a nice restaurant, and the staff are kind, good humoured and efficient I'm willing to pay a fair price for them to be properly paid.

    There's little joy in things being cheap, by dint of ground-down, underpaid, sad-eyed staff serving you.

  • rate this
    0

    Comment number 356.

    @309

    the forward guidance creates volatility, see today as an example. speculators holding shares are up speculators holding pounds are down

 

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