British Pound Rebounds as BoE Maintains Interest Rate

February 4, 2021
British Pound Rebounds as BoE Maintains Interest Rate February 4, 2021 Lennox Hamilton

The Bank of England left its benchmark interest rate unchanged at a historical low of 0.1% in a unanimous decision, while deciding to continue with its bond purchase program in the policy meeting conducted earlier today.

The monetary policymakers pointed out that Covid-19 vaccine launches in several countries across the globe, including the UK, have enhanced the economic forecast, but reiterated worries about the rising infections, mainly from the new strand of virus, and the related enforcement of prohibitions to contain the outbreak.

The central bank also clarified that the Prudential Regulation Authority’s decision to begin engagement with PRA-governed companies on functional considerations associated with the likely implementation of negative interest rates was not aimed to hint about the possibility or advent of that kind of policy.

Following the monetary policy announcement, the pound wiped off a portion of losses to rise above the $1.36 level, as speculators gave away bets on negative interest rates this year based on the above clarification by the BoE. Earlier today, the pound hit its lowest exchange rate against the greenback in two and half weeks on the release of weak economic data.

According to the IHS Markit, the country’s construction sector shrank in an unanticipated manner in January as fresh car sales fell by 39.5% y-o-y as sales outlets throughout the country remained locked, paving way for the worst beginning of the year in over five decades.

The IHS Markit/CIPS UK construction PMI fell to 49.20 in January 2021, a decrease from 54.60 in the earlier month and far below market anticipations of 52.90. The recent reading hinted a drop in aggregate construction output for the foremost time since May 2020, as a revived drop in business activity and a fresh decrease in jobs related to civil construction ventures negated robust expansion in the residential division.

During the same period, fresh order increased at the slowest pace in seven months as the third countrywide lockdown and worries over the short-term economic view paved way for higher reluctance among customers. Employment fell due to lack of substitution to those who exit after finishing of projects. With respect to price, inflationary pressure linked to input costs increased to the highest level in more than two-and-a-half years.

Fresh car registrations in the UK plunged 39.5% y-o-y to 90,249 units in January 2021 as sales outlets throughout the country remained shut. Demand for private buyers and big fleets fell by 38.5% and 39.75, respectively. Sales decreases were also posted in both diesel and petrol car registrations, which dropped by 50.6% and 62.1%, respectively.

Nevertheless, on an optimistic note, battery electric vehicle (BEV) purchase increased 54.4% to grab 6.9% of market share. Following the steep decline, the SMMT has downwardly revised its outlook for this year, stating that it anticipates not more than 1.90 million cars to be registered in 2021, down from over 2 million estimated earlier, considering the sharp negative effect on first-quarter performance and specifically in March.

The IHS Markit/CIPS UK Composite PMI was upwardly revised to 41.20 in January, from the initial estimate of 40.60. The reported figure was far below the reading of 50.40 recorded in December and signaled the steepest contraction of the private sector economic activity since May last year. While manufacturing sector declined slightly to 54.10 in January, from 57.50 in the prior month, service sector dropped to 39.50, from 49.40.

Employment fell for the eleventh consecutive month and sharply increasing input prices were recorded across the private industry, driven by transportation bills and the passing of increasing transportation costs by suppliers. In an optimistic note, business anticipations improved from December level in both service and manufacturing industry. Overall, optimism across the UK private sector recorded its highest level since May 2014.

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