Analysis-Bank of England offers 'something for everyone', except sterling
By Amanda Cooper and Yoruk Bahceli
LONDON/AMSTERDAM (Reuters) — The Bank of England's modest rate hike on Thursday soothed politicians' angst over runaway borrowing costs while its pledge to deliver more if needed signalled to markets that it won't let up on inflation, but there was little comfort for the pound.
After lifting rates by 50 basis points in June, the BoE reverted to a 25 bp hike, to 5.25%, and said high inflation meant rates would remain elevated for some time, a decision that Insight Investment fixed income specialist Andy Burgess said had «something for everyone».
While BoE Governor Andrew Bailey stressed the central bank will stick to its guns, even though the economy looks set to grow only minimally in coming years, the BoE for the first time called its current monetary policy stance «restrictive».
Some investors took that as a sign the tightening cycle may be nearing an end, although the bank also said it would ensure rates are «restrictive for sufficiently long to return inflation to the 2% target».
Sterling initially dropped, reflecting disappointment after traders had priced in a 30% chance of another 50 bp hike. Longer-term gilt yields, more responsive to investors' perceptions about the economic growth trajectory, rose by the most in a month.
The pound fell as far as $1.26200, down 0.8%. It has lost practically all of July's gains that had taken it to a 15-month high against the dollar.
«We think we've passed the point where tighter monetary policy is supportive for the pound,» said Josefine Urban, fund manager at LGIM, noting the BoE's reference to «restrictive» rates.
«That implies persistent downward pressure on the growth and employment outlook, which is unlikely to be good for sterling,»
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