Bank of England leaves interest rates at 0.25%, Sterling falls sharply

Following its latest policy meeting, the Bank of England Monetary Policy Committee (MPC) maintained interest rates at 0.25%.

There was a 6-2 vote for the decision with Saunders and McCafferty both voting for an immediate increase in interest rates to 0.50%. Forbes has not voted for an increase like he did in June when the it was closer to interest rate increase.

Both the rate decision and vote split were in line with consensus forecasts, but Sterling still fell sharply.

Why did Sterling fall sharply?

There had been some speculation that the bank could raise interest rates and the decision to leave rates on hold triggered some selling on disappointment.

The Bank of England left its inflation forecasts broadly unchanged with a slight lowering of the GDP growth projections, although the changes were minor.

The main damage to Sterling came from a lack of any guidance or hints on whether interest rates would be increased this year. In previous comments, some bank officials, including Chief Economist Haldane had stated that he would probably vote for a rate increase this year if economic forecasts were met. There was, however, no follow-up or suggestion of a rate increase.

The bank also stated that it was making contingency plans surrounding the possibility of a disorderly Brexit and there was a perception that the bank was less confident surrounding the outlook.

The comments overall fuelled expectations that the Bank of England would lag behind other global central banks in raising interest rates which undermined Sterling.

Overall, currency trends are driven to an important extent by sentiment and the bank’s rhetoric failed to inspire confidence in economic trends or the currency.

GBP/USD declined to lows below 1.3120 from 1.3235 ahead of the decision while EUR/GBP strengthened to a 9-month high above 0.9000.

Sterling confidence is liable to remain weaker in the short term, although investors needing to Sell Euros against Sterling over the next 2-3 month could take advantage of current favourable levels to take out a forward contract to sell Euros.

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