LONDON: Sterling hit a two-week low on Tuesday after a Bank of England policymaker said a batch of weak UK data would be “very material” for the bank’s next policy meeting, having last week said he needed more evidence of economic weakness before backing an interest rate cut.
While stopping short of openly backing a cut in interest rates or quantitative easing (QE), Martin Weale said in a Financial Times interview that last week’s purchasing managers’ data for the services and manufacturing sectors - which pointed to the sharpest contraction since the 2008-09 financial crisis - were “a lot worse” than he had thought.
Weale said the numbers would be “very material” for the decision the BoE’s monetary policy committee (MPC) takes at its meeting next week.
Sterling slipped as low as $1.3057 in morning trading in London, its weakest since July 12, before recovering to about $1.3100 by 1455 GMT, leaving it down 0.3 percent on the day but over 3 cents higher than a 31-year low hit last month before it was clear who Britain’s prime minister would be.
Some strategists said the comments from Weale carried less potency because he is due to step down from the MPC after next week’s meeting, and they did not change the picture much.
“It’s not a complete game-changer for him, it’s just that he wanted to see more incoming data before the August meeting,” said UBS’s director of G10 currency strategy Constantin Bolz.
“Also I think markets are fully pricing in a rate cut for the August meeting - the only question is how strongly will the Bank of England downgrade their forecasts in the Inflation Report?” The BoE surprised markets in July by not cutting the benchmark borrowing cost from its current historic low of 0.5 percent. But minutes of the decision showed most policymakers expected to back an unspecified package of measures to boost the economy at the central bank’s next meeting.
“We continue to think that sterling will drop lower,” said Societe Generale currency strategist Alvin Tan.
“We do expect further stimulus from the Bank of England, and on top of that we’ve only just started to see the data flow from the post-referendum period, which we think will continue to be quite negative.”
A Reuters poll published on Tuesday found that while economists almost unanimously expect the BoE to cut rates next week, a slim majority reckon it will hold off on restarting its asset purchase programme for now. Sterling has tumbled almost 12 percent against the dollar since Britons voted to leave the European Union last month. Investors are worried that “Brexit” will have negative consequences for the economy and in particular Britain’s already huge current account deficit, which will widen further if investment flows dry up.
Against the euro sterling fell 0.1 percent to around 84 pence.
GDP data for the second quarter is due on Wednesday.—Reuters
