Pound extends losses as BOE says hikes depend on smooth Brexit

[LONDON] The pound fell the most in a month after the Bank of England voted to keep rates unchanged by a 7-1 vote, an outcome that disappointed those betting the ranks of dissension would grow.

Sterling traded at its lowest level in a week after policy makers left rates at 0.25 per cent, a decision forecast by all 55 economists in a Bloomberg survey. The currency neared its strongest level since September in the run-up to the decision.

Some in the market expected a 6-2 vote, said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd in London. The outcome "is disappointing for the bulls, no question. The fact we stuck at 7-1 may imply the panel is expecting a rough Brexit."

While the central bank said monetary policy may need to be tightened "by a somewhat greater extent over the forecast period than the very gently rising path implied by the market curve underlying the May projections," that outlook is contingent on avoiding a so-called Brexit 'cliff edge' where the UK leaves the EU without transitional arrangements in place.

The pound fell 0.7 per cent to US$1.2852, its biggest one-day drop in a month. The pair had earlier reached US$1.2949, before declining after data on Thursday showed UK industrial output and trade were weaker than forecast in March.

Below is a compilation of analysts' comments after the BOE decision:

Banco Santander SA: "It might be that the market was expecting more, perhaps more than one vote for a hike," says Stuart Bennett, head of its G-10 currency strategy. "Alternatively, it might imply a strong reluctance to push cable above 1.3000. The rise since the election was called can be put down to a short squeeze, but even though the market remains very short GBP it perhaps requires better news than I thought it would to pull it even higher, with the spectre of Brexit negotiations hanging over it."

Commerzbank AG: "It appears that market participants had expected a much more hawkish BOE - probably another dissenter going for a rate hike apart from Forbes," said Thu Lan Nguyen, a Frankfurt-based foreign exchange strategist. "The BOE's forecasts, and a potentially earlier rate hike, are based on the assumption that the adjustment to the UK's new relationship with the EU is smooth. Considering the latest tensions between the two, market probably is skeptical and is therefore reacting rather negatively."

Credit Agricole CIB: "Brexit rather than inflation the driver here," said analyst Manuel Oliveri. "It remains an environment in which rate expectations are capped but where the growth outlook is subject to downside risks and that is not a positive for the currency."

"One must keep in mind too that that expectations regarding a smooth Brexit have been rather falling."

BLOOMBERG