Tue, Oct 18, 2016 page10

• British pound sterling mired near lows

  LITTLE CONFIDENCE: A newspaper said that Chancellor of the Exchequer Phillip Hammond might resign, while a selloff in gilts is hurting sentiment toward the pound

  • Reuters, LONDON
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  Sterling yesterday traded below US$1.22 and weakened against the euro, hurt by rising gilt yields and media reports of disagreements between British Chancellor of the Exchequer Phillip Hammond and his Cabinet colleagues over the terms of Britain’s exit from the EU.

  The Daily Telegraph said Hammond could quit his post after he was excluded from government meetings because he criticized the “hard” Brexit stance of British Prime Minister Theresa May.

  Although the Treasury denied that Hammond is going to quit, it did little to instill confidence in the pound, traders said.

  Sterling fell to US$1.2172, having lost over 6 percent in the past two weeks after May raised the specter of a “hard” Brexit where the government will negotiate for an exit that favors tighter immigration controls over free trade, likely curbing foreign investment needed to fund Britain’s huge current account deficit.

  Traders said that the selloff in gilts was hurting sentiment toward the currency. The 10-year UK gilt rose to 1.17 percent, trading near its highest since the June referendum.

  “Investors are beginning to demand a higher premium for holding UK government debt because of two factors — the political uncertainty and risks about the economic impact of Brexit, and inflation expectations are rising on the back of a rapidly declining pound,” said Kathleen Brooks, research director at City Index, a local brokerage.

  Speaking to the BBC, Bank of England Deputy Governor Ben Broadbent said the weakness in sterling could cause inflation to overshoot its 2 percent target, but that tightening monetary policy would have “undesirable consequences.”

  That was broadly in line with what bank Governor Mark Carney told a public meeting on Friday.

  Carney said he was willing to allow inflation to run “a bit” higher than the central bank’s 2 percent target to help employment and allow Britain’s economy to grow.

  Inflation is expected to rise above 2 percent next year because of a sharp fall in the value of the pound — a 16 percent tumble to record lows in trade-weighted terms.

  At the same time, the economy is expected to slow as Britain begins the complicated process of leaving the EU and tries to negotiate new trade deals, leaving the economy facing a potentially toxic mix of a tumbling currency, rising bond yields, accelerating inflation and sluggish growth.

  “Some seem to interpret these [surge in bond yields] as an early indication of capital outflows from the UK, which could escalate into a full-blown balance of payments crisis,” Credit Agricole said in a note.

  However, with UK stocks rallying, it was unlikely that foreign outflows were gathering pace, it said.

  “This interpretation is further corroborated by anecdotal evidence from our recent meetings with clients in Asia. These confirmed that capital outflows from the UK and/or reserve diversification out of sterling are not an imminent threat,” it added.
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