By Carla Mozee, MarketWatch
LONDON (MarketWatch) -- U.K. stocks moved higher Wednesday, but
the pound dropped sharply, as the prospects for an interest-rate
hike before year's end year dimmed after the Bank of England
slashed its view on wage growth.
The Bank of England in its quarterly inflation report said it
now expects wages, on average, to increase by 1.25% this year. That
view is half its previous wage-growth projection of 2.5%. The
central bank has signaled it wants stronger wage growth before it
begins raising its benchmark interest rate.
Ahead of the report, the Office for National Statistics said
average weekly earnings, excluding bonuses, rose at an annual pace
of 0.6%, which was slower than a FactSet-compiled projection of
0.7%. The government also said unemployment rate fell to 6.4% in
the three months to June, in line with expectations for the rate to
hit its lowest level since 2008. The unemployment rate was 6.5% in
the three months to May.
Market reaction: Investors pushed the pound (GBPUSD) to an
intraday low of $1.6700, according to FactSet data, as they
considered the possibility that the key interest rate will stay at
0.5% through the rest of 2014. The currency pair late Tuesday
traded around $1.6814. Sterling hasn't traded below $1.67 since
mid-April.
But on the equities side, shares of interest-rate-sensitive
banks rose further after the BOE report, with Royal Bank of
Scotland advancing 2%, Barclays PLC up 1.5% and HSBC higher by
1.4%.
Home builders, a sector also sensitive to interest rates, gained
as well. Barratt Developments picked up 1.4%, Taylor Wimpey
advanced 1.8% and Persimmon added 0.9%.
The FTSE 100 strengthened after a choppy start, moving up 0.3%
to 6,652.19. Miners were among session decliners, with Rio Tinto
down 1.2% as the iron ore producer's shares traded without dividend
rights. Shares of Glencore PLC were off 2.7%.
Views: Nick Beecroft, senior market analysts at Saxo Bank,
pointed in an interview to Bank of England Gov. Mark Carney's
comment that the monetary policy committee had a broad range of
views on the remaining slack in the economy, or an economy's
capacity to increase employment without increasing inflation.
That "broad range" in views "might be a hint that we will indeed
see that at the August [policy] meeting there was dissent," on
whether to hold the key rate at 0.5%, said Beecroft. Minutes from
the meeting will be released on Aug. 20.
Beecroft said he still views an interest-rate increase as
possible to take place before Christmas. "If we get robust
employment figures again in September and other readings on the
economy are looking good" -- and the bank views the ONS's figures
on wages as understated -- "it's increasing likely that we see rate
hikes in October, November or December."
The Bank of England had been expected to be the first central
bank among the Group of Seven developed economies to raise interest
rates, "but it is increasingly apparent that the BoE may keep rates
on hold as long as the Fed," and that could push the pound/dollar
pair toward the $1.6500 level over the medium-term horizon, said
Boris Schlossberg, managing director of FX strategy, in a note.
"For now the pair appears to have found a modicum of support
ahead of the 1.6700 figure but shorts may test that level," during
Wednesday's North American trading session, he said.
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