Broadbent Interview Confirms No 2015 Interest Rate Rise

The British pound to euro exchange rate, and other GBP pairs, took a fresh beating on comments issued by the Bank of England's Ben Broadbent.

The message from Broadbent added to the pound sterling's woes on Friday morning. Interest rate levels are the oxygen the exchange rate markets crave at the moment - higher intrest rates command higher exchange rates.

The Bank of England MPC member told a BBC interviewer: "We expect to be some way away (from an interest rate hike).

"We are clearly closer to the time at which rates may have to go up, but that does not mean we're fixing some particular point in the future."

He said BoE Governor Mark Carney had not given an explicit message about a late-2015 rate hike in a speech last month, contrary to some media reports which interpreted it that way. It was this speculation that saw the GBP rally against the euro and US dollar through the course of July.

Indeed, the Bank of England told markets on Thursday the 7th that there is no rush to raise rates.

Only one MPC member, Ian McCafferty, voted for an increase in the Bank Rate at the meeting, confounding expectations for at least two dissenters.

A 8-2 vote split was required to keep GBP levels where they were going into the event and 8-3 would have prompted the rally many were expecting.

At the time of writing:

• The pound to euro exchange rate (GBPEUR) is at 1.4142 - back below 1.42 and we reckon en route to 1.40.
• The pound to dollar exchange rate (GBPUSD) is at 1.5446. For in-depth coverage of GBP/USD following the non-farm payroll release, please see here.
• The pound to Australian dollar exchange rate (GBPAUD) is at 2.1045.

The MPC voted 8-1 to hold rates at their current 0.5% level and QE at £375B.

The BoE’s inflation forecast over the 2-3 year horizon was relatively unchanged, at just a hair above 2.0% two years out, and 2.14% at the three year horizon. The MPC’s estimate of slack in the economy remained at around 0.5% of GDP, unchanged from the May Report.

Inflation was revised down over the near-term, with the MPC pointing to strength in sterling and weak oil prices as key factors supressing near-term prospects.

"The message from “Super Thursday” is that interest rates are unlikely to rise this year. Only one MPC member, Ian McCafferty, voted for an increase in the Bank Rate at yesterday’s meeting, confounding expectations for at least two dissenters," says Daniel Vernazza at UniCredit Bank, striking a positive tone for the longer-term outlook.

The expectation was that at least two, and potentially three, of the committee were likely to vote for a small rate-hike whilst Carney will be expected to elaborate on his hawkish comments about an end of year lift-off after the quarterly report is revealed.

With only one voter opting to raise rates the market were disappointed and promptly sold sterling.

"The GBP seems to be bearing the brunt of the adjustment, confirming our expectations that the FX market was ahead of rates markets in looking for a more hawkish stance from the MPC," says Ned Rumpletin at TD Securities.

TD think the relatively large move in the currency is a function of long GBP positioning by shorter-term players who had approached this event expecting a more overtly hawkish outcome.

"We remain bullish on the GBP overall, however, and view this as only a temporary setback," says Rumpletin.

The pound has recovered from its initial losses in the wake of the event confirming that the initial sell-off was reactionary.

It is testament to the Bank of England's consistent and clear communications on interest rate policy that markets are largely back to where they were ahead of the meeting.

"In general, the fundamentals of the UK are strong and we expect GBP to be a relative outperformer in G10. We like GBP against the commodity currencies and remain long GBPNOK in our Strategic FX Portfolio. However, we have converted our short EURGBP position into short EURSEK," say Morgan Stanley.