Sterling rallies following BoE rate decision

Ryan Fowler

July 14, 2016

The Bank of England’s decision to hold interest rates at 0.5% has seen sterling rally – showing increased confidence the UK economy.

It briefly traded as high as $1.3470, a 2.7% gain on the day, but has since eased back to $1.3342.

David Lamb, head of dealing at FEXCO Corporate Payments, said: “QE aside, interest rates are the Bank of England’s biggest monetary policy weapon. But with rates already so low, the Bank only has one bullet in the chamber – and today it opted to delay pulling the trigger.

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“While the Monetary Policy Committee’s minutes predict many storm clouds on the horizon, it clearly fears playing its rate cut trump card too early.

“The bank’s surprise caution came as a jolt to currency markets that had convinced themselves that a cut today was a done deal.

“The result was a strong upward spike for the Pound against both the Dollar and the Euro, but few will see this as much more than a temporary respite.

“With the MPC’s next meeting barely three weeks away, the prospect of a rate cut remains real and close.”

But Lamb added that the current direction which the Bank of England is taking appears to be the right one.

He said: “But with little hard economic data to back up the dire – but still largely anecdotal – evidence of a post-referendum downturn, the bank’s ‘wait and see’ approach makes sense.

“If there is a time for the MPC’s grandees to cut rates, it will be in August when they have the bank’s next Inflation Report in hand and a clearer picture of the impact of the Brexit vote on the UK economy.

“As a result today’s Sterling rally won’t be immediately erased, but the outlook for the Pound remains weak.”

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