Bank of England Concludes Rate Hike Series, Pound Declines

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The Bank of England left interest rates unchanged on Thursday, interrupting a long series of rate hikes as the British economy slowed, sending the pound to a six-month low and giving stocks a boost listed in London.
The pound fell 0.9% to its lowest level since the end of March, while gilt yields were little changed and London-listed shares recovered, share market sectors Interest rate-sensitive stocks, such as real estate stocks and home builders, have rebounded.

Investors were already rushing on Wednesday to reduce their bets on further rate hikes in the UK after data showed British inflation slowed surprisingly in August.

MARKET REACTION:

FOREX: The British pound was down 0.7% at $1.2255, from $1.22935 earlier in the day. Against the euro, the pound was down 0.6% at 86.89 pence, having traded around 86.70 pence before the decision.

MONEY MARKET: Interest rate futures showed traders think there is a 70% chance the central bank will leave rates unchanged at its next meeting in November, up from around 50/50 before decision. Two-year gilts, the most sensitive to changes in rate expectations, showed little immediate reaction, and were up 5 basis points on the day at 4.887% from 4.894% earlier.

STOCKS: The FTSE 100 erased most of the day’s losses to trade 0.1% lower, compared with a 0.7% decline earlier.

RICHARD GARLAND, CHIEF INVESTMENT STRATEGIST AT OMNIS INVESTMENTS, LONDON:

“The Bank appears to have concluded that monetary policy is already tight enough to stem strong wage growth, given weakness elsewhere in the labor market, and to bring inflation back to its target level.

“Better-than-expected inflation figures this week may have contributed to the Bank of England’s decision not to raise interest rates today. There may have been points of conflicting views, but ultimately the doves’ observation that the previous tightening has not yet affected the economy – which is already weakening – seems to have won the day.”

“The Monetary Policy Committee always refers to its flexibility to respond if things change, but this is likely to be the high point of this UK interest rate cycle.

GILES COGHLAN, CHIEF MARKET ANALYST CONSULTING FOR HYCM, LONDON:

“The Bank of England (BoE) faced many moving parts ahead of today’s decision. But with yesterday’s benchmark still three times higher than the Bank’s target BoE and wage growth remains strong, the BoE clearly wants to mark inflation for good.”

“However, there is a risk that the delay effect on interest rate rises means that today’s decision may not be felt for 9 to 12 months.” So, with economic growth already hesitant and core inflation remaining high, today’s increase risks overly constraining the economy and inducing a period of stagflation in the longer term.”

“Investors are expecting the BoE to signal an interest rate cut. So the pound’s reaction could be muted, especially after yesterday’s CPI failure, which weakened the pound ahead of the meeting. ‘today. However, the pound could slide further if markets anticipate future stagflation and perceive a policy error by the BoE.’

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