LONDON (Reuters) – The British pound briefly extended its rise on Thursday after the Bank of England kept interest rates and its bond-buying programme on hold while largely sticking with its forecasts for an economic recovery.
Investors will be closely watching for any signals from the central bank when the BoE governor speaks later at a news conference on plans for how it will eventually reverse its stimulus, as some policymakers elsewhere begin to taper asset purchases.
By 1115 GMT, sterling traded at $1.3916, more or less where it was before the BoE decision and after briefly spiking to as high as $1.3945 a few minutes after the decision.
Against the euro the pound rose 0.2% 85.11 pence.
Gilt yields initially jumped, with the 10-year yield up to 0.540% compared to 0.510% just before the statement, but quickly gave up that gain to trade at 0.508% by 1125 GMT.
Two-year yields also rose as high as 0.108% before easing to 0.070%..
Sterling has been a strong performer in recent weeks as COVID-19 cases – while still high – have fallen and high vaccination rates have allowed the British government to lift most social-distancing rules.
Britain’s economy has recouped much of its 10% crash of 2020 and is on course to match the United States and grow at the fastest pace among major affluent nations this year.
On Thursday the BoE said its Monetary Policy Committee voted 7-1 to keep its government bond-buying programme at 875 billion pounds ($1.22 trillion). Michael Saunders voted to scale back the programme.
The BoE has said price growth could hit 4% later this year – double its target – but crucially policymakers see inflation rises as temporary, a point reiterated on Thursday.
“The economy is cautiously reopening but the Bank of England’s Monetary Policy Committee has yet to see enough economic activity to justify adjusting its current policy. Yes, we have witnessed a heroic rebound from the economic crash last year, but the recovery has not been evenly distributed,” said Jeremy Batstone-Carr, a European strategist at Raymond James.
The BoE also said that it would start reducing its stock of bonds when its policy rate reaches 0.5% by not reinvesting proceeds, and it would start considering selling down its holdings when the rate reaches at least 1%
Analysts said before the BoE decision that there was a risk of sterling falling as investors reprice the possibility of a hawkish tilt from the central bank. Two dissenting policymakers calling for a cut to stimulus had spurred a rally in the pound.
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