London - The pound fell after Ian McCafferty, the Bank of England’s (BOE) only policy dissenter over the past six months, dropped his call for higher interest rates and officials cut their growth and inflation forecasts.
Sterling weakened versus all of its 16 major peers as the Monetary Policy Committee, led by Mark Carney, voted 9 to 0 to keep its official rate at a record-low 0.5%. The decision was published alongside new economic projections showing inflation will remain below 1% until the end of the year. BOE officials said the pound’s recent declines may reflect risks of the referendum on the UK’s membership of the European Union.
“The BOE sees external risks and austerity coming and is likely to keep rates low for a long time to offset this drag,” said Daniel Brehon, a foreign-exchange strategist at Deutsche Bank AG in London. Brehon said Deutsche Bank remains bearish on sterling.
The pound dropped 0.3% to $1.4560 as of 12:25 p.m. in London, after climbing 1.3% on Wednesday. It fell to $1.4080 on January 21, the lowest since 2009. Sterling weakened 1% to 76.82 pence per euro.
Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a quarter-point increase to the official bank rate until after March 2017. At the turn of the year an increase in November 2016 was priced in.
The BOE’s decision on Thursday came against a backdrop of global policy divergence, with the Federal Reserve lifting its key rate in December, the Bank of Japan adopting negative rates last week and the European Central Bank signalling its stimulus plan may be reviewed next month.
Pound slides
Sterling has dropped more than 5% since the day before the BOE’s November inflation report, touching the lowest level since 2009 last month. Even so, the UK currency has rallied since then and climbed the most in almost four months on Wednesday, as signs of a slowing US economy helped derail bets on diverging policies between global central banks.
“The MPC judges the risks to the central projection to be skewed a little to the downside in the near term, reflecting the possibility of greater persistence of low inflation,” the committee said on Thursday.
“Low realized inflation will continue to moderate the increase in wage pressure in the near term.”
UK government bonds declined for the first time in three days, pushing 10-year gilt yields up five basis points, or 0.05 percentage point, to 1.58%. The 2% security due in September 2025 fell £4.55 per £ 000 face amount, to 103.70. The yield dropped nine basis points in the previous two days.