Publications
Partners
London - The pound touched the weakest level versus the euro since May as Britain’s inflation rate unexpectedly turned negative for the second time since 1960 in September, strengthening the case for the Bank of England (BoE) to delay raising interest rates.
Sterling dropped versus most of its 16 major peers, heading for its steepest decline against the dollar in almost three weeks. BOE policy maker Gertjan Vlieghe said inflation risks are skewed to the downside and that price growth needs to pick up before he will vote for a rate increase.
His comments to UK lawmakers were his first public remarks since joining the Monetary Policy Committee last month.
“Already before the data the market was nervous and prepared for disappointing data - and that was exactly what was delivered,” said Esther Reichelt, a currency strategist at Commerzbank AG in Frankfurt.
“As long as CPI data don’t show a pick up in inflation, the longer the MPC might tend to stay on hold. At least the data don’t give a reason for increased nervousness within the MPC to hike rates.”
The pound depreciated 1% to 74.74 pence per euro as of 12:05 and touched 74.75 pence, the weakest level since May 7, the day of the UK general election. Sterling dropped 0.7% to $1.5241, set for its biggest decline since September 23.
Prices slide
UK consumer prices fell an annual 0.1% after stagnating in August, the Office for National Statistics said. Economists had forecast a further month of stagnation. Prices last declined in April, which was the first sub-zero reading since 1960.
The data also showed core consumer-price growth increased 1%, compared to analysts forecast for a 1.1% gain. Traders will also be watching employment and wage growth data on Wednesday for more clues about the strength of the UK’s economic recovery.
Sterling was boosted earlier in the year amid signs that the UK was growing at a pace that would allow the BOE to raise interest rates On a trade-weighted basis, the UK currency rose to the highest level in seven years in July. Now it has fallen to the lowest level since February.
Vlieghe said the exchange rate is “reasonably strong.” In his comments to the UK’s Treasury Select Committee he described economic growth as solid “but not fantastic.”
Rate outlook
Forward contracts based on the sterling overnight index average, or Sonia, suggested that a full 25 basis-point increase in the BOE’s key rate won’t come until after December 2016. The central bank’s official rate has been at a record-low 0.5% since March 2009.
“It looks like it will take a little longer than the bulls expected to get annual CPI above 1%,” said Jordan Rochester, a currency strategist at Nomura International in London.
“The BOE pricing has been pushed out so far that this doesn’t really change the ball game too much. The BOE is still likely to hike earlier than what is priced.”
