Sterling lower after BOE holds rates

Sterling has lost ground after the Bank of England decided to leave interest rates unchanged following its latest monetary policy meeting – slightly wrongfooting the market which had leaned towards a rate hike – though it is off its lows trading at $1.2260 against the dollar and at around 86.7p to the euro. The single currency, meanwhile, has fallen to around $1.0620 against the dollar after the release of soft September PMI readings for France this morning.

The fallout from the Fed’s ‘hawkish’ hold on Wednesday continued yesterday. In government bond markets, US 10-year yields rose further to close at 4.50%, while UK and German yields also ended higher at 4.30% and 2.75% respectively (though yields are edging down at the open today). Equity markets were also under pressure, with US and European stocks shedding around 1.5% on the day.

The Bank of England’s decision to keep interest rates on hold at 5.25% was a very close call, with four of the nine members of its Monetary Policy Committee (MPC) voting for a 25bps hike to 5.5%. The MPC noted that policy is ‘restrictive’, which if maintained for ‘sufficiently long’ will help return inflation to target. However, it did warn that ‘further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”

Retail sales in the UK partially recovered in August according to data published earlier this morning, with volumes rising by 0.4% following a (part poor weather-related) decline of 1.1% in July. On an annual basis, sales were almost 1.5% lower than in August last year. More positively, consumer confidence improved in September, according to the GfK index.

ECB’S Knot (one of its more hardline members) says he is “satisfied at the moment with where we are with monetary policy because I believe that at this interest rate level we have a credible prospect of inflation returning to 2% in 2025”, while similarly, his colleagues Stournaras says he thinks the central bank “has reached the interest-rate peak.”

Economic data due today includes flash PMIs for September for the Euro area, UK and US. The August PMIs pointed to contracting economic activity in the Euro area and UK, and a slowdown in the pace of activity in the US.