Published: Wed, August 10, 2016
Economy | By Melissa Porter

Sterling hit by rate-setter's comments

On the second day of its new program, the United Kingdom central bank said it could only buy £1.12 billion ($1.5 billion) of gilts.

Indeed, the BoE cut its benchmark rates by 25bp to 0.25%, launched TLTRO II-like refinancing operations (the Term Funding Scheme), expanded QE with the purchase of an extra GBP60bn Gilts (to GBP435bn) and added a credit-easing scheme with the purchase of up to GBP10bn non-financial corporate bonds.

The Bank will have to make up the shortfall at a later date to fulfil its recently announced QE plans.

While acknowledging that there could be more rate cuts in the months ahead, BoE policymaker Ian McCafferty said in a column in The Times Tuesday that there should be a "more gradual" approach to quantitative easing because he feared a rise in inflation.

Yields on five- and 10-year gilts also hit all-time lows.

On Monday, HSBC analyst David Bloom and his team said in a note circulated to clients that it believes sterling will fall much further in the coming months. So the question becomes: "how much more negative can we get for the pound without any more bad news?"

Mr McCafferty opted to increase borrowing costs in the six Bank of England meetings from August 2015.

New Zealand's dollar was steady despite expectations that the Reserve Bank of New Zealand will cut interest rates by 25 basis points to 2.00 percent on Thursday, when regional forex liquidity is likely to be thinner than usual due to a public holiday in Japan. We still doubt the United Kingdom economy will be able to avoid a technical recession at the turn of the year.

"Whilst the BOE programme is expected to be slightly smaller than the ECB's compared to the size of the estimated eligible universes, the effect can be as great, if not greater", said Jonathan Pitkanen, the head of investment-grade research for EMEA and Asia at Columbia Threadneedle Investments, which oversees about 344 billion pounds of assets.

Yields on United Kingdom government 10-year bonds fell by 9 basis points to 0.591%, falling below 0.60% for the first time in history.

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