x Abu Dhabi, UAEFriday 19 January 2018

British pound plunges to three-year low against US dollar

What's Down: Sterling has taken a pounding in the past two days as the Bank of England's rate-setting committee strikes an unexpectedly dovish tone.

Sterling plunged to a three-year low against the dollar this week as expectations build about a further dose of monetary stimulus for Britain's spluttering economy.

A catalyst for the slide was the release of minutes from the Bank of England suggesting growing support for increased policy easing.

The pound has fallen as much as 1.9 per cent during the past two days to lows of US$1.5132 and has shed 5.6 per cent of its value against the greenback so far this year. Against the euro, sterling's performance has fared worse still, falling 6 per cent so far this year as fears surrounding the break-up of the single currency receded and the UK's status as a perceived safe haven appeared more doubtful.

The release on Wednesday of minutes from the central bank's rate-setting committee meeting showed an unexpected level of a support for increased stimulus measures and signals that policymakers were comfortable with inflation exceeding target rates.

"Inflation was likely to rise further in the near term and could remain above the 2 per cent target for the next two years, reflecting sterling's recent depreciation and the persistent contribution from administered and regulated prices," the minutes said.

Three members of the Bank of England's rate-setting committee called for a £25 billion expansion of quantitative easing measures to £400bn. The minutes had set expectations for greater quantitative easing in the months to come, Khatija Haque, senior economist at Emirates NBD, wrote in a research note.

Mark Carney, the incoming Bank of England governor, is widely tipped to favour a more aggressive approach to stimulating the British economy than his predecessor, which is driving some bearishness on sterling.

"While the recent fall probably partly reflects concerns about inflation and expected changes in monetary policy - the so-called 'Carney short' - it has also reflected the growing view that the UK's economic outlook is nearly as bad as the euro zone's," analysts from Capital Economics wrote.