By Dhara Ranasinghe
LONDON (Reuters) – Sterling fell to a two-week low on Thursday after two Bank of England officials unexpectedly voted to cut interest rates this month and others said they would consider a cut if global and Brexit headwinds did not lift.
The BoE said that its nine-member Monetary Policy Committee voted 7-2 to keep its key rate at 0.75%, in sharp contrast to forecasts in a Reuters poll for a unanimous decision.
So far the central bank has resisted following the U.S. Federal Reserve and the European Central Bank in cutting rates in response to Brexit challenges and a global slowdown caused by a protracted U.S.-China trade war.
Thursday’s news took markets by surprise, pushing sterling down against its major rivals.
The British currency fell to its low point in nearly two weeks – down as much as $1.2794 <GBP=D3>. It was last down 0.26% on the day at $1.2827. After falling almost 0.4% against the euro following the Bank of England’s decision, the pound was flat against the euro at 86.14 pence. <EURGBP=D3>
London’s benchmark FTSE 100 stock index was last up 0.13% <.FTSE>, in line with a weaker pound and as other European markets gained on signs of progress in U.S.-China trade talks.
“We have had some sterling underperformance but the moves so far are relatively contained,” said Jordan Rochester, a FX strategist at Nomura in London. “There have been a couple of times where dissenting BoE members get the markets excited but actually the politics or the data changes the narrative.”
Rochester said the big focus for currency traders was next month’s snap parliamentary election, with uncertainty on that front likely to weigh on the pound.
Increasingly economists believe the BoE will cut interest rates at some point next year given a slowing economy and uncertainty over Britain’s planned exit from the European Union.
Expectations of a quarter percentage-point rate cut have risen to 40% by March 2020 compared with 25% earlier, according to Refinitiv and CME data.
“The message from the BoE is pointing to the downside for sterling,” said Neil Jones, head of hedge fund currency sales at Mizuho bank in London. “Surprising votes for rate cuts voice concern over domestic and global risks. Given how the UK is such an international economy, this is understandable.”
A hung parliament outcome at the Dec. 12 election could also boost the possibility of a rate cut early next year, In that scenario UBS Wealth Management sees a 25 bps rate cut by May.
“The markets got really complacent about a (Prime Minister Boris (Johnson) majority, [thinking] Brexit’s done..The probability of a hung parliament is bigger than what people are pricing in,” said Craig Inches, head of rates and cash at Royal London Asset Management.
Graphic: Sterling weakens after BoE decision – https://fingfx.thomsonreuters.com/gfx/mkt/12/8356/8285/gbp0711.png
(Reporting by Dhara Ranasinghe with additional reporting by Yoruk Bahceli; Editing by Mark Heinrich)