Investors in the pound have waited more than six years for the Bank of England (BOE) to raise interest rates and bolster the UK currency. With money markets signaling no move next year, it looks like they might have to wait longer.
The central bank has held its key rate at a record-low 0.5 percent since March 2009 and forward contracts based on the sterling overnight index average (SONIA) are not fully pricing in a quarter-point rate increase until January 2017, data compiled by Bloomberg show.
Speculation that rates are to 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 against the US dollar since April.
That policy outlook contrasts with the US 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 utilizing 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,” he said.
The pound rose 0.1 percent this week to US$1.4908 as of 1:02pm in London on Thursday. It dropped as low as US$1.4806 on Tuesday, the lowest since April 15. Sterling depreciated 0.7 percent to ￡0.7344 per euro, having touched ￡0.7416 on Tuesday, the weakest level since Oct. 15.
UK government bonds fell this week, sending the 10-year yield up nine basis points, or 0.09 of a percentage point, to 1.92 percent. The 2 percent 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 eurozone’s benchmark sovereign debt, returning 0.6 percent through Wednesday, according to Bloomberg World Bond Indexes. Germany’s bonds earned 0.4 percent, while US Treasuries gained 0.9 percent.
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