Sterling slips in reaction to Bank of England dovish minutes

Traders are betting officials will keep the Bank Rate unchanged through 2016, according to forward contracts based on the sterling overnight index average, or Sonia. The longest-serving current member is Martin Weale, who joined in August 2010, more than a year after the last change in rates.

However, with decent economic data in the United Kingdom, including some modest growth in wages, some are cautiously predicting a rate hike by mid-2016.

“Clearly there’s going to be some pre-pricing of a move in rates this week”, said Dominic Bunning, a strategist with HSBC in London.

The Federal Open Market Committee will hold its last meeting of the year next week and is widely expected to raise the USA benchmark federal funds rate, which has been held near zero since late 2008.

Archer expects the bank to act in May, after which it will likely wait for a while to see how the economy reacts to the hike.

The MPC also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves (otherwise known as Quantitative easing) at £375 billion.

It added that a likely rise in the dollar’s value in the wake of a USA rate rise could lead to dollar loans becoming less affordable.

The British Chambers of Commerce (BCC) warned over the UK’s reliance on consumer spending to drive growth as it downgraded its forecast for gross domestic product (GDP) growth for 2015 and the next two years.

“Raising rates this year will, in my view, serve to reduce monetary policy uncertainty and to keep the economy on track for sustained growth with price stability”, Mr Harker was reported as saying.

It’s surprising the pound weakened so much after the decision because officials barely changed their outlook, said Adam Cole, Royal Bank of Canada’s head of global foreign-exchange strategy. The yield on Serbia’s dollar bonds maturing in 2021 rose 1 basis point to 4.496 percent. Inflation was minus 0.1 per cent in inflation and is forecast by the Bank to have been slightly positive in November.

The BCC believes rates will rise in the third quarter of 2016, although it stresses that global economic woes could push it back further, while Investec Economists are pencilling in a rise in the second quarter of next year. Indeed, the BoE argues not to over-estimate the recent rises in wage growth as inflationary driver; on the contrary, it points towards additional downside risks to the expected moderate recovery of inflation over the coming months, due to renewed lower oil prices.

Barclays analysts also called for the kiwi to fall ahead of Wednesday’s Reserve Bank decision on rates, saying a cut was only 40 percent priced in by the market.