BoE Leaves Interest Rates On Hold ? Pound Sterling (GBP) Declines

On Thursday the Pound posted widespread declines in response to the Bank of England’s interest rate decision. Speculation surrounding the timing of the first UK interest rate increase has been mounting all year in response to the BoE's adapted its forward guidance policy. The central bank had originally tied hiking borrowing costs to the UK unemployment rate, but with the level of joblessness declining far more rapidly than economists had anticipated that strategy was ditched. The central bank has since intimated that the pace of wage growth will need to rise in line with inflation before interest rates are increased. BoE Governor Mark Carney has gained notoriety for offering conflicting statements on the subject, and the Pound has experienced extensive fluctuations as a result of all the upheaval. For a while November had been set as the month which would see the benchmark interest rate increased from the record low of 0.5%. However, since then the pace of UK economic growth has slowed markedly and some serious global headwinds have emerged.

Today the BoE completely quashed hopes that interest rates might rise before the close of the year. Following its November policy meeting the central bank announced that interest rates would remain on hold. It also left the level of its asset purchases unchanged. This decision supports the forecast issued by the National Institute of Economic and Social Research yesterday. NIESR asserted that the BoE will begin a gradual rate hiking cycle towards the middle of next year. It stated; ‘Recent weak inflation numbers appear to have alleviated the pressure to tighten monetary policy. On balance, we think the risk of waiting a few more months to start raising interest rates outweighs the risk from a premature tightening.’

The Pound Sterling exchange rate softened across the board in the hours following the Bank of England’s decision. The Pound to US Dollar exchange rate fell to a low of 1.5885 and consolidated these declines after the US published encouraging initial jobless and continuing claims figures. The Pound to Euro (GBP/EUR) exchange rate initially fell to 1.2711 but later pared losses as demand for the Euro was sapped by comments issued by the European Central Bank. The Pound to Australian Dollar (GBP/AUD) exchange rate lost around 0.4%, as did the Pound to New Zealand Dollar (GBP/NZD) pairing. Tomorrow the UK will be releasing its trade balance figures. These could cause further Pound Sterling movement before the weekend. It is expected that the UK’s total trade deficit will widen in September. BoE Governor Mark Carney is also due to speak in Paris. Dovish comments from the central banker would be negative for the Pound.