Bank of England surprise statement sends sterling tumbling

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Sterling fell and bond yields tumbled after the Bank of England surprised markets by indicating it saw no reason to withdraw monetary stimulus after the first meeting of the monetary policy committee chaired by new governor Mark Carney.

In an unexpectedly detailed statement, the committee admitted that while inflation would rise in the short term they saw no reason for the sharp rise in yields on government bonds, known as gilts, in the recent weeks. It was regarded a departure from the stance adopted by Carney's predecessor Sir Mervyn King who retired last week and who rarely issued statements immediately after MPC meetings.

As expected the MPC left interest rates on hold at 0.5% – the historic low they have been at for more than three years – and quantitative easing unchanged at £375bn.

But it was the statement that sparked moves in gilts and sterling after economists interpreted the remarks by the MPC as putting Carney in the dovish camp and likely to keep supporting more electronic printing of money.

Gilt yields have risen more than one percentage point in the six weeks since the US Federal Reserve began discussing reducing its stimulus from the US economy. In addition, 10-year gilt yields have risen from 1.6% at start of May to 2.5% amid expectations that the Bank could also start to pull back its stimulus. But gilt yields fell back to 2.352% after the statement was released while sterling fell more than 1.7 cents against the dollar to 1.5090.

The decision not to embark on more QE had been expected and follows a string of upbeat data that has reinforced hopes that growth in the UK economy was stronger in the second quarter than the first, when gross domestic product increased by 0.3%.

"At its meeting today, the committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May (inflation) report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the committee's view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy," the MPC said.

Former MPC member Andrew Sentence tweeted: "Inflation is set to rise, and BoE statement pours cold water on rate rises. Pretty dismal signal from MPC to Britain's savers."

"With gilt yields having recently been sent significantly higher amid increased global financial market turmoil, the MPC likely felt it was a good move to make it clear at an early stage that any tightening in UK monetary policy is a considerable was off," said Howard Archer, chief European and UK economist at IHS Global Insight.

Economists said more QE was also a possibility at the August policy meeting, by which point the MPC will have seen the Bank's latest forecasts for growth and inflation ahead of its next quarterly inflation report.

Since its last quarterly inflation report in May, the MPC said on Thursday that 12-month CPI inflation – a measure of consumer prices – had risen to 2.7% and could rise further before falling back. It also noted that interest rates being priced in by markets had risen sharply and asset prices been volatile. "In the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time," the MPC said. Interest rates have been at an all-time low of 0.5% since March 2009, the same month that the MPC made the unprecedented decision to introduce QE, its asset purchasing programming.

James Knightly of ING said: "This is pretty aggressive stuff that has prompted a sharp move lower in sterling and suggests that Carney is very much in the dovish camp".

Carney succeededKing as the Bank's governor on 1 July and how he voted at the meeting will not be known until 17 July.

But it is now clearer that next month the MPC could start to provide guidance about the potential future path of interest rates, following in the footsteps of the Fed and marking a departure for the Bank. In the statement issued after the first meeting Carney chaired, the MPC said: "The latest remit letter to the MPC from the chancellor had requested that the committee provide an assessment, alongside its August inflation report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the committee's policy discussions in August."

The CBI's director of economics Stephen Gifford, said: "Looking ahead, some form of forward guidance on interest rates remains a strong possibility. Although the MPC's scepticism will be hard to dispel, recent financial market volatility and today's statement by the Bank have strengthened the case for providing greater clarity around monetary policy, which businesses would welcome."

Economists said more QE was also a possibility at the August policy meeting, by which point the MPC will have seen the Bank's latest forecasts for growth and inflation ahead of its next quarterly inflation report.

Since its last quarterly inflation report in May, the MPC said on Thursday that 12-month CPI inflation – a measure of consumer prices – had risen to 2.7% and could rise further before falling back. It also noted that interest rates being priced in by markets had risen sharply and asset prices been volatile. "In the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time," the MPC said.

Powered by Guardian.co.ukThis article was written by Jill Treanor and Angela Monaghan, for guardian.co.uk on Thursday 4th July 2013 13.15 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010

 

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