More Uncertainty for the British Pound

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Mark Carney. Image via Bank of England

The Bank of England Governor, Mark Carney spoke to reporters on Tuesday last week, where he said that it was not the right time to raise interest rates. He said that weak wage growth and inflationary pressures suggested that rates will remain for a period of time.

Despite the dovish comments from the BoE Governor, just a day later, the central bank’s chief economist, Andrew Haldane spoke expressing his hawkish views. He said that the central bank should begin tightening policy as early as the second half of the year.

The conflicting views continue to add to the uncertainty in the British pound which is hit by the Brexit negotiations, the political landscape, and the central bank’s divided views.

Dovish Carney speech just a week after BoE meeting

Speaking at Mansion House, the BoE Governor’s comes just a week after the Bank of England voted to keep interest rates unchanged at 0.25%. However, the monetary policy committee was divided on rate hikes. Interest rates were kept steady at 0.25% on a 5 – 3 vote. There were no changes made to the central bank’s asset purchase program, which remained unchanged at 435 billion British pounds.

Carney said that the mixed signals on consumer spending and business investment alongside subdued domestic inflation and anemic wage growth were the reasons to keep interest rates steady.

Inflation in the UK continues to outpace wages. In May, consumer prices accelerated 2.9%, whereas wages rose just 2.1%. This was slower than the month before which was also revised lower from 2.4% to 2.3%. Over the last two months, the pace of wage growth is seen falling.

The British pound weakened after the BoE Governor’s comments. Further downside in the GBPUSD is expected amid a host of other factors, including the Brexit negotiations that have started with the EU. With both the economies showing a stark divergence, the outlook is negative for the British pound.

EU economy expected to pick-up amid broad strength

Meanwhile in the EU economic data is showing signs of a pick-up across different regional economies as well. According to official forecasts, growth is expected to come from other regional countries as well. Thus the Eurozone’s growth is expected to be less reliant on just Germany.

Given that political headwinds are also abating, the outlook is seen to be positive with investors focusing on the Eurozone economy. Analysts are expecting to see the European Central Bank (ECB) begin to tighten its monetary policy as well. Pressure has been mounting on the ECB to taper its sovereign bond and corporate bond purchases as well some calling for normalization of interest rates as well.

So far, the ECB is not quite convinced about tightening monetary policy, especially with inflation seen pulling back slightly in May. A few months of a steady uptick in inflation will no doubt make it more difficult for the ECB to justify its current monetary policy.

Carney also said that in the months ahead, central bank officials will assess the extent of weak consumption growth and whether this could be offset by other aspects such as demand and rising wages.

The Governor said that he would like to get a clear assessment of the economy and how it could react to tighter monetary policy and financial conditions, not to forget, the Brexit negotiations as well.

Carney’s speech was no doubt dovish, but it was in contrast to his previous views during the June monetary policy meeting.

Among the MPC members who voted for a rate hike included Kristin Forbes, Ian McCafferty, and Michael Saunders. The members also suggested a partial withdrawal of stimulus in order to push inflation lower.

Carney also warned the downsides of protectionist policies, which according to him was seen rising globally. “Excessive trade and current account imbalances are now politically as well as economically unsustainable,” Carney said.

Speaking alongside the BoE Governor was also the Chancellor Philip Hammond who said that the UK should pursue free trade agreement so that it covers both goods and services.


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