By Carla Mozee, MarketWatch
LONDON (MarketWatch)--U.K. stocks rose Wednesday, but the pound
took a beating as prospects for an interest-rate increase before
year's end dimmed after the Bank of England slashed its view on
wage growth.
The Bank of England in its quarterly inflation report said it
now expects wages, on average, to increase by 1.25% this year. That
view is half its previous wage-growth projection of 2.5%. The
central bank has signaled it wants stronger wage growth before it
begins raising its benchmark interest rate.
Ahead of the report, the Office for National Statistics said
average weekly earnings, excluding bonuses, rose at an annual pace
of 0.6%, which was slower than a FactSet-compiled projection of
0.7%. The government also said unemployment rate fell to 6.4% in
the three months to June, in line with expectations for the rate to
hit its lowest level since 2008. The unemployment rate was 6.5% in
the three months to May.
Market reaction: Investors pulled the pound (GBPUSD) to an
intraday low of $1.6686, according to FactSet data, as they
assessed the possibility the key interest rate will stay at 0.5%
through the rest of 2014. Sterling hasn't traded below $1.67 since
early April. The pound fetched $1.6695 late Wednesday compared with
$1.6814 late Tuesday.
But on the equities side, shares of interest-rate-sensitive
banks rose further after the BOE report, with Royal Bank of
Scotland advancing 1.9%, Barclays PLC up 1.1% and HSBC higher by
1.3%.
Home builders, a sector also sensitive to interest rates, gained
as well. Barratt Developments picked up 2.8%, Taylor Wimpey
advanced 2.1% and Persimmon added 1.6%.
The FTSE 100 strengthened after a choppy start, finishing 0.4%
higher at 6,656.68. Miners were among session decliners, with Rio
Tinto down 1% as the iron ore producer's shares traded without
dividend rights. Shares of Glencore PLC fell 2.5%.
Views: Nick Beecroft, senior market analysts at Saxo Bank,
pointed in an interview to Bank of England Gov. Mark Carney's
comment that the monetary policy committee had a broad range of
views on the remaining slack in the economy, or an economy's
capacity to increase employment without increasing inflation.
That "broad range" in views "might be a hint that we will indeed
see that at the August [policy] meeting there was dissent," on
whether to hold the key rate at 0.5%, said Beecroft. Minutes from
the meeting will be released on Aug. 20.
Beecroft said he still views an interest-rate increase as
possible to take place before Christmas. "If we get robust
employment figures again in September and other readings on the
economy are looking good"--and the bank views the ONS's figures on
wages as understated--"it's increasing likely that we see rate
hikes in October [or] November or December."
Carney's comments at his news conference also underscored the
central bank's view "that the lagged effects of sterling's
appreciation will contain inflationary pressures in the months
ahead," wrote Sam Hill, senior U.K. economist, at RBC Capital
Markets, in a report.
A rate hike before the end of the year "is feasible," said Hill,
"but given the developments on the inflation forecast, the clear
signal that we take from today's report is that the odds of a move
before the end of 2014 have reduced further." RBC still expects the
first rate increase to be issued in February, sized at a
quarter-percentage point.
The Bank of England had been expected to be the first central
bank among the Group of Seven developed economies to raise interest
rates since the financial crisis.
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