Pound falls ahead of interest rate cut decision at the Bank of England

Expectation that the Bank of England would take action to prevent further shock movements in the pound has kept it trading around 31-year lows

Hazel Sheffield
Thursday 04 August 2016 10:47
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Mark Carney, governor of the Bank of England, was expected to announce an interest rate cut at the last meeting of the Monetary Policy Committee in July
Mark Carney, governor of the Bank of England, was expected to announce an interest rate cut at the last meeting of the Monetary Policy Committee in July

The pound was down against the US dollar on Thursday ahead of the Bank of England's interest rate decision.

The dip signalled that traders had already accounted for cut in the central bank base rate taking it from a historic low of 0.5 per cent to 0.25 per cent.

The pound was down 0.2 per cent at $1.3296 in early trade in London.

Mark Carney, governor of the Bank of England, was expected to announce an interest rate cut at the last meeting of the Monetary Policy Committee in July. The pound surged when no rate cut was forthcoming as traders rushed to correct their positions.

At the time, analysts said that Carney did not have enough economic data to make a decision about a rate cut.

Many regarded the latest data from the Markit/Cips PMIs as decisive.

“A quarter-point cut in interest rates seems to be a foregone conclusion at tomorrow’s Monetary Policy Committee meeting, though the extent and nature of other non-standard stimulus measures remains a far greater source of uncertainty and the subject of intense speculation,” said Chris Williamson, chief economist at Markit, following three surveys that showed UK GDP was set for a quarterly decline of 0.4 per cent.

The UK service sector suffered its biggest month-on-month decline since records began, according to the data.

The figures follow data showing that construction has slowed at its fastest pace since 2009 and manufacturing at the fastest pace since 2013, giving the first full picture of how the UK economy has reacted to the shock result of the EU referendum.

Expectations that the Bank of England would take action to prevent further shock movements in the pound has kept it trading around 31-year lows first reached in the aftermath of the referendum.

“I think a cut plus 100 billion pounds in new quantitative easing is probably the barrier (to more falls),” Richard Benson, co-head of portfolio investment at currency fund Millennium Global in London, told Reuters.

He added that Governor Mark Carney would probably be able to massage the pound lower by hinting at further steps to come at his post-decision news conference.

Commenters said that another disappointment would see the pound surge back towards levels not seen since the weeks before the vote, around $1.3850.

“It would almost be as if Brexit had not happened,” Benson said. “There would be a scramble.”

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