The pound dived 0.8pc against the dollar this afternoon after the Bank of England decided to hold interest rates at 0.25pc and downgraded its 2017 UK growth forecast to 1.7pc, a 0.2 percentage point fall.
With the absence of hawkish former policymaker Kristin Forbes, the BoE’s Monetary Policy Committee voted 6-2 in favor of keeping rates unchanged. Governor Mark Carney said in his press conference that some tightening of monetary policy would be necessary for the next three years and that two hikes in that period are likely to be insufficient.
The internationally-focused FTSE 100 has been buoyed by sterling’s fall, closing 63.34 points higher at 7474.77, a 0.85pc rise. Retailer Next soared 9.7pc after reporting a sales boost from a warmer summer while medical supplier ConvaTec plunged 6.4pc as earnings took a hit from rising costs.
On the FTSE 250, satellite operator Inmarsat slumped 3.7pc after reporting that its maritime division continued to struggle while Cobham rallied 8.4pc as the green shoots of a recovery emerged at the troubled defense firm.
IG market analyst Chris Beauchamp said this on today’s events:
“The Bank of England might be gloomier about the outlook for the economy, but that gloominess has been transmuted into sterling weakness, and from there into FTSE strength, with the index being the standout winner this afternoon.
“It seems that we are a little further away from a rate increase, something that was already a very distant prospect. On the face of it, the pound’s steady rally has taken a knock, but there is little sign that the dollar weakness that went hand in hand with sterling strength has abated.”
It seems increasingly unlikely that there will be an interest rate rise before the end of the year with the markets now putting the probability of a hike by December at 33.7pc. Have your say on when Mark Carney and the Monetary Policy Committee should raise interest rates?
1. The Bank of England left interest rates at 0.25pc and downgraded its growth forecast for 2017 from 1.9pc to 1.7pc. It now believes that the UK economy will grow at 1.6pc compared to its previous forecast of 1.7pc.
2. The Monetary Policy Committee voted 6-2 in favor of keeping rates unchanged but policymakers signaled that they were on course to rise within a year. Chief economist Andy Haldane voted against a rise despite previously hinting that he had changed his mind.
3. The pound plunged following the decision and dropped further as a dovish Bank of England governor Mark Carney warned about the risks of Brexit in a press conference. Against the dollar, sterling has fallen 0.7pc, trading at $1.3145.
4. Mr. Carney said some tightening of monetary policy would be necessary for the next three years and that two hikes in that period are likely to be insufficient.
5. When asked whether the move to an interest rate of 0.5pc would be the start of a traditional hiking cycle, Mr. Carney said that there would be fewer hikes than a normal cycle but more than the market currently expects.
Sterling has stabilized in the currency markets and even nudged up slightly against the dollar after the ISM non-manufacturing index in the US missed expectations, coming in at an 11-month low.
It leaves the pound 0.8pc lower against the greenback, a very slight improvement from its lows just after Bank of England governor Mark Carney’s appearance.
Mr. Carney’s post-match press conference was dominated by the words “Brexit” and “sluggish” if anyone was unsure of his feelings towards the UK’s decision to leave the EU.
The dovish appearance of the governor didn’t help the pound this afternoon with it dropping further against the dollar as he spoke. However, Sterling is still sitting near its 11-month high against the greenback.
Connor Campbell, an analyst Spreadex, said this on the market’s reaction to today’s events:
“Sterling caught a case of the Bank of England blues this Thursday, the currency baulking at the dose of dovishness served up by Mark Carney.
“Carney and co. actually argued that if the economy continued to perform in line with the central bank’s August projections then ‘monetary policy could need to be tightened to a somewhat greater extent’ than currently expected by the markets.
“However, that wasn’t enough to distract Sterling from the raft of bad news released this afternoon, which also included a Brexit-plagued post-meeting press conference.”
The overwhelming risk for the Bank of England is that the economy stalls from a premature rate hike, according to Ben Edwards, fixed income manager at BlackRock.
“The only dynamic that may call for a tightening of policy is excesses in consumer credit and the Bank of England has been clear that the FPC and not the MPC is the least blunt tool for that job.”
According to ING, the takeaway for the markets from ‘Super Thursday is “brace yourselves, winter is coming”. Apparently, that’s a Game of Thrones reference which is completely lost on me. This extra comment that its foreign exchange strategist Viraj Patel makes a bit more sense to me:
“The slightly more cautious growth projections, the dichotomy of MPC views and a lack of coherent policy bias mean the bar for a 2017 policy move still remains pretty high; we continue to see a credible BoE rate hike debate being more of a 2018 story.”
Britain’s powerful services sector accelerated a touch in July, raising hopes that the economy overall is now gathering steam.
Businesses reported accelerating growth in new orders from customers and said they are increasing the pace at which they take on extra workers to cope with the demand.
The purchasing managers’ index (PMI) from IHS Markit edged up to 53.8 in July, rising from 53.4 in June and beating economists’ forecasts.
Any score of above 50 shows business activity is rising.
Manufacturing growth has also picked up the pace, although the construction sector is struggling to stay positive as companies are cautious about signing large building contracts.
The survey “suggests that the economy has maintained the momentum that it gathered over the second quarter,” said Ruth Gregory at Capital Economics.