Sterling weakens vs euro as BoE ramps up stimulus

LONDON (Reuters) - Sterling fell against the euro on Thursday after the Bank of England increased its already huge bond-buying stimulus by 150 billion pounds and signalled more support ahead.

FILE PHOTO: A British pound note is seen in front of a stock graph in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration

Bank of England Governor Andrew Bailey said the central bank was ready to pump even more money into Britain’s economy if the outlook for inflation weakens.

The BoE kept its benchmark interest rate unchanged at 0.1% on Thursday. Its expansion of its bond buying programme by 150 billion pounds was less than some had expected, prompting the pound to initially rise against both the euro and the dollar, before pulling back against the euro.

“The pound (initially) gained on the (BoE) decision and this is because it had already tumbled yesterday on reports saying that the BoE is considering a move into negative interest rates and that it could expand its QE programme by 150 billion to 200 billion pounds,” said Charalambos Pissouros, senior market analyst at JFD Group.

The Telegraph newspaper had reported late on Wednesday, without citing any sources, that the central bank was considering a move into negative interest rates, while The Sun newspaper had reported that the central bank might expand its quantitative easing programme by 150 billion to 200 billion pounds.

Governor Andrew Bailey said the central bank would look into how The Sun got hold of the information. The pound later retreated against the euro.

However, it held onto gains against the dollar, which weakened broadly as investors adjusted for the prospect that Republicans will maintain control of the U.S. Senate and stifle any plans for a large new stimulus package if Democrat Joe Biden becomes the next U.S. president.

British Finance minister Rishi Sunak announced on Thursday he was ploughing more money into Britain’s 200 billion-pound ($262 billion) economic rescue in a coordinated move with the Bank of England, which will buy more of the bonds being sold to fund it.

The BoE is reviewing how negative interest rates would work in Britain if necessary.

“It increasingly looks as though negative rates will only be seen if there is no (Brexit) trade deal - not even a poor-quality one,” said Kit Juckes, macro strategist at Societe Generale.

Negative interest rates would trigger record lows in sterling’s real effective rate, Juckes said, and could send the pound to as low as 95 pence a euro.

The pound was up 0.6% at $1.3075. Against the euro, it fell marginally to 90.25 pence per euro.

“Moving ahead, we believe that the pound’s faith is likely to stay mostly linked to developments surrounding the Brexit landscape,” Pissouros said.

“Anything suggesting that a deal could be found in the next few weeks may prove supportive for the currency, while signs that the differences-gap is not narrowing may result in weakness,” he added.

Sterling three-month implied volatility gauges fell below 9%, their lowest since mid-August, suggesting investors were less worried about unexpected swings as Britain’s transition period after its exit from the European Union comes to a close.

Reporting by Olga Cotaga, editing by Larry King and Susan Fenton