LONDON (Reuters) - Sterling was on track for its worst weekly performance since early August after a Bank of England policymaker said the central bank may well need to cut interest rates in the likely scenario that high levels of Brexit uncertainty persist.
The dovish comments from BoE policymaker Michael Saunders cap a tough week for the pound, in which concerns about a deepening political standoff in a reconvened parliament over Brexit have undone much of the currency’s recent recovery.
While lawmakers have passed legislation that forces Prime Minister Boris Johnson’s government to seek a Brexit delay and avoid a no-deal exit from the European Union on Oct. 31, Johnson continues to vow that Britain will leave next month.
Investors do not like the uncertainty and have sent the pound hurtling lower from a two-month high of $1.2582 hit last week.
On Friday, sterling weakened as much as 0.4% to $1.2270 after Saunders gave the first clear signal that the central bank is considering a rate cut.
It later rebounded to $1.2309, still down 0.1% on the day.
“It’s in contrast to the last MPC (monetary policy committee) minutes, which still guide the market to a rate hike in the case of an orderly Brexit,” said Kallum Pickering, an economist at Berenberg.
Pickering said Saunders was a “known hawk” so his dovish tilt was important, especially if the view that a rate cut could be necessary even if no-deal Brexit was averted became more widely shared by other policymakers.
On the other hand, Pickering noted that the UK domestic economy was “holding up well” and inflation pressures were still to the upside.
Viraj Patel, a strategist at Arkera, said Saunders was “typically nimble in his views”, hadn’t spoken for some time and noted that external MPC members often have “very different views to internal BoE”.
Sterling dropped 0.3% versus the euro to 88.850 pence. Yields on two, five and 10-year Gilts dropped close to 5 basis points before recovering somewhat.
A weaker pound lifted the export-focused benchmark stock index, with the main equity index climbing 0.8%.
Reporting by Saikat Chatterjee and Tommy Wilkes; Editing by Karin Strohecker, William Maclean, Kirsten Donovan