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UPDATE 1-Little joy for pound as BoE tightens credit controls
June 27, 2017 / 10:28 AM / in 4 months

UPDATE 1-Little joy for pound as BoE tightens credit controls

* Graphic: sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Adds later details)

By Patrick Graham

LONDON, June 27 (Reuters) - Sterling fell almost half a percent against a broadly stronger euro on Tuesday, a tightening of capital controls on banks offering only brief support given competing interpretations of what it means for interest rates and growth going forward.

The defection by several Monetary Policy Committee officials to the camp supporting a rise in base interest rates has given the pound, battered by another round of political uncertainty after this month’s elections, some support in the past week.

On the one hand, reinstating the 0.5 percent of risk-weighted assets banks are asked to hold as a buffer against shocks to consumer finances was a sign of confidence in an economy which has looked to be slowing.

But it may also take any unwanted steam out of areas of loan growth which could otherwise be cited as one reason for raising rates, helping policymakers hold off for longer with any hike in the Bank’s main borrowing rates.

“When you’re looking at the buffer, they have increased it and that is a marginal tightening of monetary conditions, and hence possibly a plus for the pound,” said Oanda analyst Craig Erlam.

“The interesting thing for the next few hours is will people see it as the compromise between policymakers that lets them agree to leave rates where they are for now? Sterling is drifting off now and we may see a further retreat.”

After jumping around 0.2 percent to as high as $1.2770 immediately after the Bank’s announcement, the pound retreated to trade just 0.1 percent higher on the day at $1.2735.

It fell half a percent to 88.29 pence per euro.

Derek Halpenny, a strategist with MUFG in London, has been one of the bank analysts calling for a rise in sterling in recent months, judging the worst of the pound’s Brexit-led sell-off is now in the price.

But he also says the uncertainty generated by Prime Minister Theresa May’s loss of her parliamentary majority in elections on June 8 has made it harder for sterling to rise in the near term.

May has sealed the deal she needs to approve a stripped-down legislative programme, but many political commentators still expect another election to be called in the next year under a new Conservative leader.

After initial salvos on EU citizens’ rights in the past week, Halpenny said it will be how the rest of the talks on Britain’s departure from the European Union pan out that should be crucial to sterling in the coming weeks.

“While macroeconomics might start to have a greater influence, the big events are still Brexit related,” he said.

“The sooner this first stage of talks is over and we can get on to what investors really care about - the negotiating of a smooth transition period - the better (for the pound).” (Editing by Ed Osmond)

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