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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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
    0

    Comment number 835.

    The whole system is a farce. The pound falls sharply and the market rises by nearly 200 points, a similar reaction to when unemployment figures spiral. I know , why don't we get some financial advice from Wall Street? We must have loads to learn from a country with a National debt of $15 trillion!

  • rate this
    +1

    Comment number 834.

    Why is growth (i.e. higher interest rates and inflation) so important? I'd be quite happy with an equilibrium. If, in 5 years time, I can still buy a bottle of milk for £1, I'll be happy.
    Banks are the only winners in a system where they have created 97% of the money as loans(debt). Why not stop them creating money and breaking the economy for profit?

  • rate this
    +1

    Comment number 833.

    Wonderful news!

    Keep the interest rates at an all time historic low to enable debtors to make merry and the banks to look solvent.

    Keep interest rates as low as possible to deny those evil savers any income on their ill-gotten gains.

    Low interest rates = not propping up a discredited system of finance.

    Can I have a bonus point now BBA?

  • rate this
    0

    Comment number 832.

    Look it does not take an idiot to realize that unless people have a chance to save, not only for there own life time but that of there children etc... the country will never return even impart to the good old days of spend, spend, spend, oh and forget the credit check, were loaded right? Or am I missing something? As BOE interest rates should exclude consumer credit, to restore the UK's economy?

  • rate this
    +2

    Comment number 831.

    Oh Dear.

    New Gov is the Emperors new clothes.

    Expect stagnation for 5 years then when the populace realises it has been hoodwinked in the name of eternal house price rises then the sh*t hits the fan and home owners will take a haircut of about 30%.

    The real problem is the banking industry. They are ruining this country at the expense of value added business, manufacturing,etc.

  • rate this
    +2

    Comment number 830.

    @828

    Yes, not enough space for all relevant qualifications. The evidence is currently inconclusive, but whether or not it was useful at the time, it would certainly be harmful to attempt to undo it at this stage. The continuing overshoot of inflation is, of course, evidence that there was more QE than necessary to meet the stated aim (but the true aims remain somewhat unstated, officially).

  • rate this
    +2

    Comment number 829.

    Re 827---certainly no ogre, I agree with you-----in fact a lifeline ; and I am very glad UK had the nerve to use it for the first time. BUT....I think I mentioned power-drills and antibiotics in warning of dangers and over-use. I believe QE to be mechanism that is for emergencies, and then needs very careful withdrawl. But, as you say, those who see it as an ogre---or even ineffective--are wrong.

  • rate this
    +2

    Comment number 828.

    Re 824--I think most observers do concede that QE has done much to boost confidence and did much to ease the possible epidemic which could have decimated economies (more so than actually occurred) following the onset of the crisis from USA. SO i cannot agree with "what has uselessly been done...".
    Let us wait till the gilts and long-term asset sales give us a picture of how history will judge QE.

  • rate this
    0

    Comment number 827.

    @824 & 820, QE is not a big ogre. All the money in circulation was printed akin QE with the exception of money that appeared as a result of fractional reserve banking (see wiki). Every baby (and every immigrant -- think about it) justifies an expansion of the money supply. If QE (monetisation) never happened, you could buy a ship with £1. Rampant QE = Zimbabwe, but no comparison to sensible QE.

  • rate this
    -3

    Comment number 826.

    Some of you need to get a life. Half the world is starving. Most of the world live in far worse circumstances than we do - even in this recession.

    Get some perspective on your pathetic whinging!

  • rate this
    +3

    Comment number 825.

    With earnings cut, their small savings drawing small return plus inflation of food & house prices racing ahead it is the little people who are paying for the failures of the banks including the Bank of England. The elite still draw telephone number incomes, receive far better interest at home or abroad on their larger savings, evade/avoid any tax liability & then tell us we are all in it together.

  • rate this
    +2

    Comment number 824.

    @820 You may say it has been a "qualified success". I'd agree that it's dangers have yet to materialise, but equally, I see little evidence that it has achieved its stated aim (of avoiding inflation undershooting its target). Inflation did not undershoot, of course, but I never expected it to with the base rate at 0.5%. What has uselessly been done cannot now harmlessly be undone, however.

  • rate this
    0

    Comment number 823.

    Mr. Carney is batting for the market...All else is irrelevant to him it seems.

    This is just kicking the can down the road because the alternative is too frightening...Market and banking collapse....leading to global depression with millions on the streets unemployed and unemployable....

    Scary times...

  • rate this
    +2

    Comment number 822.

    @817 The key word there is "circulation". The debt is being partly repaid all the time, as gilts mature. The cash then quickly finds its way back into newly issued gilts. The actual amount of money in circulation is managed to be more or less enough to do the job. It has no direct relationship with the value of assets at any one time.

  • rate this
    0

    Comment number 821.

    817 creepy2. Whether you have stumbled on this or knew it already, you have just summarised one of the idiocies of our current monetary/banking system. There never can be enough to pay of the debts because P+I does not equal P.

  • rate this
    +2

    Comment number 820.

    Re 814----very much as you say. We may disagree as to whether QE is still being used or not , we agree on the principle which you lucidly espouse.
    May I say again that QE , never used in UK before, has been a qualified success ---but we must never, IMHO, drag it out whenever we feel a bit of a "pinch" in the air. It is a sensitive and volatile mechanism, very artificial, and is like antibiotics !

  • rate this
    0

    Comment number 819.

    #799
    OK - I know what you were driving at and pray god that such practices don't migrate across the pond.

    Not convinced that the US is out of the mire just yet.

  • rate this
    +1

    Comment number 818.

    @813 - Yes. Manage release of land to stabilize property; Reduce financial burden of big gov; Encourage small business so people feel the power of self determination; & Above all, reduce red tape, restrictive practices, conflict of interests, inspections, oppressive management -- and encourage progressivism & manufacturing. Do these things and the economy will take off like a rocket. @815 Cheers

  • rate this
    0

    Comment number 817.

    the debt is bigger than the money in circulation.with interest how do you pay it off explain please

  • rate this
    0

    Comment number 816.

    The economists are going to have to do a lot better 'forward thinking' than what has been going on now since 2008. With low returns, the 'solution' for the markets is volatility - higher gains and losses all round.
    The BOE's QE mutterings serve to artificially keep the GBP 'cheap' to help exports - the trouble with that, is that is stokes imported inflation which turns into stagflation. Bad ideas.

 

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