Sterling tumbles on Bank of England rates signal

Sterling tumbled versus the euro and reversed an advance against the dollar after the Bank of England yesterday signalled there is scope to keep interest rates at a record low as inflation weakness persists.

“The pound is trading lower on the Bank of England headlines,” said Neil Jones, London-based head of hedge-fund sales at Mizuho Bank.

“Inflation-target expectations have been pushed back,” but “I do expect the Bank of England to remain more hawkish relative to most other central banks which should bode well for sterling performance in the longer term,” he wrote.

Sterling weakened 0.4% to 73.67p per euro and fell 0.1% to $1.5303, retreating from a two-week high. It dropped against all but two of its 16 most-traded counterparts.

The Bank of England’s Monetary Policy Committee voted 8-1 to keep the key rate at 0.5%, while the minutes of its October meeting showed officials weighed the risk of a further global slowdown against resilient domestic demand and consumer spending.

Benchmark 10-year government bond yields fell one basis point, or 0.01 percentage point, to 1.82%.

Britain’s currency has fallen for the past three months against the dollar and the past two versus the euro as signs that global growth is slowing and the Federal Reserve’s decision to delay tightening policy prompted investors to push back their view of the Bank of England’s own rate path.

Markets suggest the UK central bank will not boost its 0.5% main rate until late 2016 and its decision to hold fire yesterday was predicted by all 41 economists in a Bloomberg survey.

Forward contracts based on the sterling overnight index average suggest a full quarter-point increase won’t come until after November 2016.

In the minutes, the Bank of England said the UK economy is withstanding pressures from the slowdown in the global economy.

This should eventually prompt investors to bring forward bets on when the central bank will tighten policy, said Petr Krpata, a London-based foreign- exchange strategist at ING Groep.