UK currency plunges as interest rates remain unchanged

By Ahmet Gurhan Kartal

LONDON

Britain’s currency plunged around 0.3 percent in value on Tuesday morning following a Bank of England announcement the U.K. was not ready for higher interest rates.

Central bank governor Mark Carney made the announcement alongside finance minister Philip Hammond in London during a speech which had been delayed because of the Grenfell Tower fire tragedy.

The Bank of England had been expected to raise interest rates after official Brexit negotiations began on Monday between the U.K. and the EU.

Pound sterling reacted to the news by plunging to its lowest level in a week. One pound was trading at $1.2675 following Carney's announcement, down from $1.275.

Carney said it would be wrong to raise borrowing costs now, before knowing how Brexit negotiations could play out.

He said wage growth was too weak to justify a rate hike and added that members of the bank’s Monetary Policy Committee were split on the issue, voting 5-3 to leave rates on hold last week.

“Different members of the MPC will understandably have different views about the outlook and therefore on the potential timing of any Bank Rate increase. But all expect that any changes would be limited in scope and gradual in pace,” he said.

“From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anemic wage growth, now is not yet the time to begin that adjustment,” Carney added.

Carney also underlined that he “would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations”.

- Brexit

On Brexit, Hammond said the Conservative Party was committed to keeping taxes as low as possible to encourage growth.

Hammond said a final Brexit deal needed to include a comprehensive agreement on trade and services. He also suggested an “implementation period” would be needed when the U.K. left the EU customs union.

Britain began Brexit talks with the EU on Monday in Brussels.

David Davis, the minister in charge of Britain’s EU exit, said the talks would see the building of a “new, deep and special relationship” with the EU.

The EU's chief negotiator, Michel Barnier, a former French foreign minister and EU commissioner, said he wanted to agree key priorities and a timetable for discussions.

Britain is due to leave the EU by the end of March 2019 following last summer's referendum vote.