Pound slips on rate rise delay

THE pound tumbled yesterday as the Bank of England all but ruled out an interest rate rise this year – just three weeks after Mark Carney put one firmly on the table.

Forecasts in the central bank’s inflation report – published yesterday on what was dubbed ‘Super Thursday’ on Threadneedle Street – suggested rates would not rise until next spring.

The outlook appeared to be at odds with the Governor’s warning last month that the decision about raising rates ‘will likely come into sharper relief around the turn of this year’.

The central bank also revealed that just one member of the monetary policy committee that sets rates voted for a hike yesterday.

That dashed expectations of two or even three dissenters in another sign rate rises may not come as soon as thought.

Kathleen Brooks, research director at Forex.com, said: ‘Yet again the Bank has hinted that rates could rise sooner than the market expects only to backtrack down the line.’

Sterling slumped as traders and analysts pushed back the likely date of when interest rates will rise until well into next year.

The pound, which has been boosted in recent months by the prospect of a rate rise late this year or early next year, fell from highs of $1.5636 and €1.4349 to lows of $1.5469 and €1.4198.

Angus Campbell, a senior analyst at currency firm FxPro, said the flurry of information from the Bank ‘threw a bucket of cold water over sterling’.

Interest rates last rose in July 2007, from 5.5pc to 5.75pc, before being slashed to 0.5pc in March 2009 during the Great Recession.

Carney insisted his comments last month in Lincoln, which fuelled speculation r ates could r i se alongside the inflation report in November or February, were a ‘personal view’.

He said that the outlook presented yesterday was the ‘best collective judgement’ of the MPC.

The inflation report appeared to endorse market expectations that rates will not rise to 0.75pc until next year – possibly in May. Rates are then on course to hit 1pc at the end of 2016 and 1.5pc at the end of 2017, according to expectations.

Carney said this was consistent with inflation returning from its current level of zero to 2pc within two years. But he said inflation would then ‘overshoot’ the target, suggesting rates may have to rise by more to keep a lid on prices.

‘As the UK expansion progresses, speculation about the precise timing of the first move in Bank Rate is increasing,’ said the Governor.

‘This is understandable and is another welcome sign of the economy returning to normal. The likely timing of the first Bank Rate increase is drawing closer. However, the exact timing of the first move cannot be predicted in advance.’

James Knightley, an economist at banking group ING, said the Governor now appears to be ‘on the more hawkish end of the spectrum of views within the committee’.

Ian McCafferty yesterday emerged as the leading hawk on the MPC when he voted for an immediate rise in rates to 0.75pc.

He argued that rising wages and strong demand could lead to ‘a more significant overshoot of inflation following its return to target’.

But he was outvoted by the remaining eight members, including Carney, meaning rates stayed at 0.5pc for at least another month.

The Bank said the outlook for inflation meant ‘it was not necessary’ to raise interest rates now.

‘Those analysts who predicted a rate rise this year may be on the bri nk of having to rip up their predictions,’ said Lucy O’Carroll, chief economist at Aberdeen Asset Management.