Currency NEWSFLASH - Bank of England Holds Interest Rates : Pound Sterling Outlook Steadies in Short-term but could slip at start of August

July 14, 2016 - Written by Minesh Chaudhari

STORY LINK Currency NEWSFLASH - Bank of England Holds Interest Rates : Pound Sterling Outlook Steadies in Short-term but could slip at start of August

The Pound may decline heavily at the start of the coming month, assuming that fears of a BoE interest rate cut materialise.

The Pound has been undeniably strong against peers lately, although a lack of economic activity tomorrow could see the UK currency slip or even fall into negatives in some pairings.

8-1 BoE Vote to Keep Rates On Hold Sees Pound Sterling (GBP) Exchange Rates Gain

The Bank of England (BoE) surprised investors earlier today by announcing that it will be maintaining its headline interest rate at its current record low of 0.50%. The minutes of this week’s policy meeting revealed that only one member of the nine man committee - Gertjan Vlieghe – had voted for a cut of 25 basis points, while the other eight members had come out in favour of keeping rates at 0.50%.

The accompanying minutes of the meeting explained that the majority view was that the Monetary Policy Committee should adopt a ‘wait and see’ approach to interest rates, noting that, ‘official data on economic activity covering the period since the referendum are not yet available.’ The notes continued in a downbeat tone, stating that, ‘there are preliminary signs that the result has affected sentiment among households and companies, with sharp falls in some measures of business and consumer confidence.’

GBP EUR Exchange Rate Advances to 1.21 Today

Gains for the Pound Sterling (currency : GBP) were limited in the aftermath of the surprise decision to ‘hold’. The Pound euro exchange rate briefly climbed above the 1.2100 GBP EUR level before settling back below the 1.2000 GBP EUR threshold once more. This limited upside for the UK unit was driven by comments contained in the minutes of the policy meeting which observed that, ‘the MPC is committed to taking whatever action is needed to support growth and to return inflation to the target over an appropriate horizon. To that end, most members of the Committee expect monetary policy to be loosened in August.’

Foreign Exchange Forecast: Will Pound Sterling Gains Last?

Most analysts forecast that this virtual pre-announcement of an August cut in rates will curb support for Sterling in the short term. However, some were not able to remain as sanguine; Alan Clarke of Scotia Bank was one, noting that,

‘Virtually nobody was going for a rate cut at this meeting before Carney’s intervention a couple of weeks ago. Most assumed that the weakness of the Pound and the need to wait for incoming data would lead to a pause at least until August. But for no apparent reason, Governor Carney decided to tease the market, let it price in a high probability of a rate cut, only to disappoint. As if the situation wasn’t volatile and uncertain enough, the BoE Governor poured petrol on the flames. This was a completely unnecessary intervention.’

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