Sterling steady above $1.32 after BoE keeps policy unchanged

LONDON: Sterling held its ground above $1.32 on Thursday as Bank of England announcement on interest rates and monetary policy outlook were broadly in line with expectations, driving some investors to unwind bets made against the currency.

While the BoE said it was still likely to cut interest rates to just above zero later this year, it said the initial Brexit hit to Britain's economy would be less severe than it expected only last month. That view underpinned the currency, traders said.

The Bank said nine rate-setters were unanimous in their decision to keep Bank Rate at its new record low of 0.25 percent. They also voted 9-0 to keep the Bank's bond-buying programme target at 435 billion pounds and to continue with its new plan to buy up to 10 billion pounds worth of corporate bonds.

Sterling was trading at $1.3235, flat on the day and broadly unchanged from before the rate decision. It had risen to $1.3243 earlier in the day after retail sales fell at a much slower pace than expected in August.

The euro fell to 84.90 pence, down 0.1 percent on the day.

"The decision merely reflects what markets already show - the UK economy is holding up very well in the wake of the vote, better than many, including the MPC and governor Mark Carney, had warned," said Neil Wilson, market analyst at ETX Capital. "The announcement was completely baked in to the markets."

Some investors had expected the BoE to sound dovish despite the economy holding up pretty well in the aftermath of the shock Brexit vote in June. Data on Wednesday showed that the labour market was resilient and business sentiment surveys earlier this month showed a bounce in activity.

Earlier in the day, data showed retail sales volumes edged down 0.2 percent on the month in August after jumping an upwardly revised 1.9 percent in July, the strongest July performance in 14 years. August's fall was smaller than the 0.4 percent drop forecast by economists in a Reuters poll.

NOVEMBER CUT

The Bank last month cut interest rates to record lows and reintroduced an asset-purchase programme.

Under the MPC's new calendar, the Bank's next rate decision is scheduled to take place on Nov. 3. That is when economists expect it to cut borrowing costs to around 0.1 percent.

The pound has broadly stabilised in the past month, holding above 1.30 against the dollar, but more political noise is likely to be generated when European Union leaders meet on Friday in Bratislava, where conditions for Britain's departure from the bloc will be high on the agenda.

The pound hit a seven-week high of $1.3445 a week ago, more than 5 percent above the three-decade low plumbed in July soon after the EU referendum, as investors trimmed record short positions against the currency.

But since then, with BoE Governor Carney leaving the door open to more monetary easing, sterling has shed ground.

"It would be wrong to be considerably more optimistic in view of the good economic data following the Brexit referendum," said Esther Reichelt, currency strategist at Commerzbank. "The uncertainty triggered by the outcome still prevails, and we see no reasons for a stronger pound."