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Sterling weaker on subdued inflation outlook, looming election

By Ahmed Aboulenein

LONDON, March 25 (Reuters) – Sterling fell against the euro on Wednesday, hitting a one-month low as investors pushed back expectations of interest rate hikes amid growing talk that inflation in Britain will stay low for sometime to come.

Annual inflation in Britain dropped to zero in February and investors are factoring in the chance of a first rate hike in mid-2016, having pushed it back from early 2016 last week.

BoE policymaker Kristin Forbes said on Wednesday that the low rate of inflation was unlikely to persist, so interest rates would need to rise as the economy recovers, but her comments appeared to have little impact on the pound.

Bank of England Chief Economist Andy Haldane said last week the bank should be ready to cut rates further if inflation looked likely to stay below its 2 percent target. The next policy move was as likely to be a cut in rates as a hike, he said.

Those comments echoed a cautious tone from the BoE’s monetary policy committee in minutes from its latest meeting released last Wednesday, where members flagged the impact of a strengthening pound on inflation.

The pound was down 0.1 percent to 73.66 pence per euro and against the dollar it was up 0.4 percent at $ 1.4900. The euro was also helped by a robust survey of German business morale.

“Our view is that the BoE won’t be hiking interest rates until February 2016 at the earliest and the current inflation outlook suggests the hike can come later rather than earlier. Consequently you have a movement higher in euro/sterling,” said Jane Foley, senior currency strategist at Rabobank in London.

“There is another factor: the approach of the British general election. The market is becoming more aware as we get closer that there could be, potentially, a significant period of time before a coalition is in place.”

Britain holds a parliamentary election on May 7 and the latest opinion polls point to a ‘hung parliament’, in which no single party can form a government on its own.

“Sterling is going to weaken in the next month because of election risk. Our forecast for cable (dollar/sterling) is $ 1.42 and for euro/sterling to trade higher in the short term. It will recover after the election,” said Phyllis Papadavid, senior global FX strategist at BNP Paribas in London.

“There is a lot of political news coming out of the UK, there is some economic news. The BoE Monetary Policy Committee members have sounded more dovish as well.” (Editing by Crispian Balmer)

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