POUND RISES AGAINST DOLLAR AFTER BOE HOLDS STIMULUS, KEY RATE

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Contributor / 2012-08-05 15:50:36

The pound rose against the dollar after the Bank of England left its bond-buying program at 375 billion pounds and kept interest rates on hold. Policy makers maintained their key rate at a record-low 0.5 percent. The central bank increased its bond purchases by 50 billion pounds last month to boost a U.K. economy in its first double-dip recession since the 1970s amid a deepening euro-region debt crisis. The pound rose 0.5 percent to $1.5608 at 1:09 p.m. London time. It fell 0.4 percent against the euro to 79.02 pence.

The Bank of England has expanded its toolkit with a Funding for Lending Scheme to unclog bank credit and help pull the country out of recession. The worsening outlook prompted banks including Morgan Stanley and Barclays Plc to revise forecasts this week and predict more U.K. stimulus later this year. The U.K. economy shrank the most since 2009 in the second quarter, the Office for National Statistics said on July 25. Manufacturing contracted the most in more than three years in July, Markit Economics reported yesterday.

Sterling extended its decline against the euro after the European Central Bank held borrowing costs at a record-low 0.75 percent. European Central Bank President Mario Draghi said last week that he will do whatever is needed to preserve the 17-nation currency. Draghi signalled the ECB intends to join forces with governments to buy bonds in sufficient quantities to ease the region’s debt crisis, while conceding that Germany’s Bundesbank has reservations about the plan. ECB bond purchases would likely focus on shorter-term maturities, would be conducted in a way to soothe investors’ concerns about seniority, and wouldn’t breach European Union rules prohibiting the financing of government deficits, Draghi told reporters in Frankfurt today.

The euro declined and Spanish bond yields rose after Draghi’s remarks, which came after a week in which markets soared on optimism he would announce a bond-purchase plan to end the debt crisis. While Draghi’s proposals go further than the ECB’s market interventions to date, he signalled that the 23- member Governing Council has yet to reach a final agreement.

Germany retained a stable outlook for its top credit rating at Standard & Poor’s just over a week after Moody’s Investors Service warned that the nation’s Aaa grade was at risk. The long-term debt sovereign rating for Europe’s largest economy was maintained at AAA, S&P said in a statement today. “In our view, Germany has a highly diversified and competitive economy with a demonstrated ability to absorb large economic and financial shocks,” S&P said. “The outlook on the long-term rating remains stable, reflecting our view that Germany’s public finances and strong external balance sheet will continue to withstand potential financial and economic shocks.” Germany is the largest contributor to Europe’s bailout packages for Greece and a collapse of that nation’s economy and its possible exit from the euro area may weigh on Chancellor German Angela Merkel’s administration.

Moody’s on July 23 lowered the outlook for the Aaa credit ratings of Germany, the Netherlands and Luxembourg to negative, citing “rising uncertainty” over Europe’s debt woes. It left Finland as the only country in the 17-nation euro region with a stable outlook for its top ranking.

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