Sterling falls as Bank of England maintains policy stance

Sterling dropped back from its strongest level against the euro since early April after the Bank of England said its pandemic-era monetary policy “remained appropriate”.

The UK currency, which traded at €1.17 ahead of the BoE’s monetary policy meeting on Thursday, lost 0.5 per cent against the common currency to €1.1650. Against the dollar, sterling fell 0.4 per cent to $1.3911.

UK economic growth has rebounded since the depths of the Covid-19 economic crisis last year while inflation exceeded the central bank’s 2 per cent target.

Some analysts had expected the BoE to take a hawkish stance in the statement following its June meeting, after US central bank officials brought forward their projections for the Federal Reserve’s first rate risk since the start of the pandemic by a year to 2023.

In its statement, however, the UK central bank signalled its rate setters were in no hurry to tighten policy. “The economy will experience a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation will fall back,” the monetary policy committee said.

The FTSE 100 index, which is stacked with exporters that benefit from a weaker pound, rose 0.5 per cent.

Chris Scicluna, economist at Daiwa, noted that rising cases of the Delta variant of coronavirus in Britain was a reason for cautious monetary policy.

“The recent pick-up in new coronavirus cases, to more than four times the rate at the time of the MPC’s May meeting, and delay to further economic reopening provides a reminder of the downside risks,” he said.

The yield on the 10-year UK government bond, which moves inversely to its price, dropped 0.03 percentage points to 0.751 per cent as traders assessed that a rate rise from the current record low of 0.1 per cent remained a long way off. This benchmark gilt yield, which influences borrowing costs for UK businesses and households, has also climbed from 0.18 per cent at the start of the year.

Elsewhere in markets, banks and retailers led the Stoxx Europe 600 share index 0.7 per cent higher after the Ifo Institute’s business climate index rose to a higher than expected reading of 101.8 in June from 99.2 last month, highlighting optimism among company bosses in the eurozone economic powerhouse.

The yield on the 10-year US Treasury note was steady at 1.487 per cent.

Futures markets signalled the S&P 500 share index would gain 0.5 per cent at the start of New York trading while the technology-focused Nasdaq Composite would add 0.6 per cent.

Brent crude, the international oil benchmark, fell 0.1 per cent to $75.08 a barrel.