London - The pound fell the most in four weeks after the Bank of England cut interest rates for the first time since March 2009, part of a suite of stimulus measures to help boost the economy after the UK’s vote to leave the European Union in June.
Sterling dropped at least 0.9% against all of its 16 major peers after the nine-member Monetary Policy Committee voted unanimously to lower the benchmark rate by 25 basis points to a record-low 0.25%.
Officials led by Governor Mark Carney increased the central bank’s asset-purchase target for the first time in four years, raising the target by £60bn to £435bn. UK government bonds jumped, pushing the 10-year gilt yield to a record low. Carney is due to speak to reporters at 12:30 in London.
The decision to cut borrowing costs was forecast by all but two of 52 economists surveyed by Bloomberg, with the majority predicting a 25 basis-point reduction. Before the announcement, swaps pricing showed a 100% chance of a cut.
Economists in a separate survey were less certain about the possibility of the BoE announcing further stimulus measures, with 23 of 44 analysts forecasting no change to the the central bank’s quantitative-easing plan.
‘Kitchen sink’
The BOE’s decision will “be initially negative for the currency as the pound rejoins the ranks of the funding currencies, but without having the luxury of a current account surplus,” Kamal Sharma, a London-based foreign-exchange and rates strategist at Bank of America Merrill Lynch, said before the announcement.
“The worst thing that could happen now is the stimulus does not work, so better to do too much. They should throw the kitchen sink at the problem.”
The pound fell 1.2% to $1.3167 as of 13:13 SA time, the steepest decline since July 5. It dropped to a 31-year low of $1.2798 on July 6. Sterling weakened 1% to 84.53 pence per euro.
The pound’s 11% lower against the dollar since the nation opted for Brexit, weakening for a third consecutive month in July, as economic consequences of the decision began to surface.
Services shrink
Data released at the end of last week showed that a measure of consumer confidence fell in July at its fastest pace in more than 25 years, while a report Wednesday confirmed that Britain’s services sector, the largest part of the economy, measured by Markit’s Purchasing Managers Index contracted last month at the quickest pace in seven years.
Recent PMI data are at “recessionary levels,” Paul Meggyesi, a foreign-exchange strategist at JPMorgan Chase in London said before the BOE announcement. There may be “at least another six months before any fiscal stimulus can take effect. If the bank believes there’s a window in which the economy does need support, then we fail to see why it wouldn’t deliver that support and then reappraise.”
Gilts Climb
Benchmark 10-year gilt yields dropped 16 basis points, or 0.16 percentage point, to 0.65%, and touched 0.634%. The 2% bond due in September 2025 rose 1.44, or £14.40 per £1 000 face amount, to £111.92. The nation’s two-year gilt yield fell 11 basis points to 0.09%.
The first rate cut by the BOE in seven years followed Carney’s pledges in the aftermath of the Brexit vote to take whatever monetary action needed to support the U.K. economy from the fallout of the decision. Carney also said that easing would probably be needed over the summer.
Yet, in last month’s policy meeting, the first since the referendum, the central bank unexpectedly kept rates unchanged. This prompted traders to increase their bets on an August cut. The central bank has already increased its liquidity operations and relaxed bank rules to encourage lending in an attempt to contain the effects of Brexit.