Pound traders see no 2016 BOE rate increase amid low oil prices
That policy outlook contrasts with the Federal Reserve, which earlier this month raised US interest rates for the first time in almost a decade
London: Investors in the pound have waited more than six years for the Bank of England to raise interest rates and bolster the UK currency. With money markets signalling no move next year, it looks like they may have longer to wait.
The central bank has held its key rate at a record-low 0.5 per cent since March 2009 and forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a quarter-point rate increase until January 2017, data compiled by Bloomberg show. Speculation that rates will remain low as policymakers attempt to boost inflation is being underpinned by oil prices that dropped to an 11-year low this week, helping to push the pound to its lowest level versus the dollar since April.
That policy outlook contrasts with the Federal Reserve, which earlier this month raised US interest rates for the first time in almost a decade.
“The Bank of England has recently created more of a divergence in policy expectations between itself and the Fed and that’s weighing down more on cable,” said Lee Hardman, a London- based currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd, referring to the pound-dollar exchange rate. BOE officials “appear to be utilising this drop in oil to buy them more time before raising rates. The fundamentals are quite similar to the US, but obviously a lot less decisive.”
Government bonds
The pound rose 0.1 per cent this week to $1.4908 as of 1:02pm in London on December 24. It dropped as low as $1.4806 on December 22, the lowest since April 15. Sterling depreciated 0.7 per cent to 73.44 pence per euro, having touched 74.16 pence on December 22, the weakest level since October 15.
UK government bonds fell this week, sending the 10-year yield up nine basis points, or 0.09 percentage point, to 1.92 per cent. The 2 per cent gilt due in September 2025 dropped 0.8, or £8 per £1,000 face amount, to 100.70.
Still, gilts this year have outperformed German securities, the euro-area’s benchmark sovereign debt, returning 0.6 per cent through Wednesday, according to Bloomberg World Bond Indexes. Germany’s bonds earned 0.4 per cent, while US. Treasuries gained 0.9 per cent.
