Dovish BOE hits the pound

The Bank of England voted 9-0 today to keep interest rates on hold in the UK, which was widely expected by the market, but the minutes following the rate decision showed the central banks concerns over the economy which caused a sell off in the pound.

Brexit was at the top of the BOE’s list and they noted that the uncertainty is taking its toll on financial markets   and putting pressure on the sterling.

Brexit uncertainties have intensified considerably since the Committee’s last meeting. These uncertainties are weighing on UK financial markets. UK bank funding costs and non-financial high-yield corporate bond spreads have risen sharply and by more than in other advanced economies. UK-focused equity prices have fallen materially. Sterling has depreciated further, and its volatility has risen substantially. The minutes said

Analysts from Citi Bank claim that the current level of the pound is pretty low by historical standards  although they are not advocating to run out and buy the currency just yet as things may become worse before the pound eventually turns around.

This all depends on the direction of interest rates and the outcome of Brexit which may be decided after the vote in January.

“GBP is relatively cheap in REER terms given the huge Brexit uncertainties. A resolution of the latter could eventually release GBP value in the context of faster BoE normalisation of interest rates. But this is a big if and we publish ahead of any ratification of a withdrawal agreement with the EU. Hence, while sterling may be a super cheap currency long term, it might get cheaper still near term.”


Analyst

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