March 11, 2020 / 11:11 AM / a month ago

Sterling bounces on Bank of England emergency rate cut

LONDON, March 11 (Reuters) - Sterling climbed against the dollar and recovered from an initial tumble versus the euro on Wednesday after the Bank of England become the second major central bank to slash interest rates in an emergency response to the coronavirus.

The move, which chopped half a percentage point off the benchmark lending rate, taking it back to a record low 0.25%, came just hours before the government sets out its budget plans.

It was the BoE’s first out-of-schedule cut since the global financial crisis in 2008.

Many London traders were still getting to their desks when the announcement came and sterling remained choppy as outgoing BoE Governor Mark Carney and his successor Andrew Bailey detailed what they called a “big package” from the bank.

A spurt of buying sent the pound up as much 0.7% to $1.2962 on the dollar though it seemed to want to go in circles versus the euro, from as low as 88.40 pence per euro straight after the cut to as high as 87.13 pence at its peak.

“We saw an immediate reaction” said Jane Foley a senior currency strategist at Rabobank. “The 50 basis point move was on the aggressive side of expectations and it was a bit of a surprise that they went before the budget.

“But it is in some way reassuring that the BoE say they have been coordinating with the Treasury, and the fact that UK authorities have prepared a comprehensive package of measures.”

As well as the rate cut, the BoE said it would allow banks to release a special store of capital, known as the counter-cyclical capital buffer, so they can continue lending to households and businesses during the coronavirus epidemic.

Finance minister Rishi Sunak is due to present his first budget shortly after 1230 GMT, which is expected to include more healthcare funding to fight the coronavirus, as well as further economic stimulus.

The U.S. Federal Reserve and the Bank of Canada both lowered rates last week although the BoC’s move was at a planned meeting. The European Central Bank is expected to take action on Thursday.

“There was no reason for this shock to turn into the experience of 2008 ... if we handle it well,” Carney said, referring to the financial crisis.

Sterling’s firmness dovetailed with a 5 basis point rise in benchmark 10-year Gilt yields, which are a broad proxy for British government borrowing costs.

The currency is down roughly 5% against the dollar since a general election in December ended a deadlock over Brexit, although it had been clawing back ground until this week. Against the euro, it has dropped almost 6% over the last month.

“This is better package than we have had elsewhere (due to the range of measures),” Saxo Bank’s head of European FX strategy John Hardy said of the BoE’s move.

The key now was if banks in the UK pick up the incentive to provide credit to firms or households or whether a bigger fiscal package was needed, he added.

On a wider level, Hardy said: “It is still yet to dawn on markets how quickly policymakers are going to have to get up to a gallop to get on top of this.” (Reporting by Marc Jones, Editing by Joice Alves and Catherine Evans)

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