May Rate Hike In Question
After trading up to print a fresh 2018 high last week, GBP quickly reversed and traded lower as the market reacted to comments made by BOE governor Mark Carney during an interview with UK broadcaster the BBC. While Carney’s comments on the May rate hike were clearly for a non-market audience, the effect was clear as GBP tumbled heavily.
The main crux of Carney’s comments was that, in consideration of recent data weakness, the bank might not raise rates in May. These comments are significant as the market was widely expecting a May rate hike, reflected by the long run of consistent GBP buying over the last 6 weeks.
Regarding this matter, Carney said “I am sure there will be some differences of view but it is a view we will take in early May [at the next meeting of the Bank’s Monetary Policy Committee], conscious that there are other meetings over the course of this year.”
Essentially it seems that Carney is highlighting his concern that members of the BOE will not support a rate hike at this meeting. However, it is also clear that Carney is trying to let the market and consumers know that even keeping policy unchanged this time around certainly doesn’t preclude a rate hike further in the year.
Dissecting Carney’s Comments on the May Rate Hike
While the perception Carney’s Comments on the May Rate Hike was dovish, fuelling a GBP sell off, scrutiny of the comments paints a more even picture. With this in mind it is worth considering what the governor actually said and weighing the implications of both.
- “We’ve had some mixed data”, there will be “differences of view” at the May meeting and “there are other meetings over the course of this year”, “I don’t want to get too focused on the precise timing” (of a rate hike), it is “more about the general path”
- These comments clearly highlight Carney’s concern that a rate hike will not occur in May and can be seen as him trying to prepare the market for this event. Recent data weakness, especially in retail sales and inflation have created an obstacle ahead of the May meeting which Carney feels will cause disagreement among policymakers and likely lead to a decision not to raise rates.
- “We’ll sit down calmly and look at it all round”, “productivity is not increasing, which will limit the rate at which people’s wages can pick up”. Though this might not seem like positive comment, this can actually be taken as a hawkish signal as any rate of wage inflation will be more inflationary combined with a lower rate of productivity growth.
- Alongside these comments, some of the non-direct quotes included in the write up of the interview by Kamal Ahmed show Carney noting that these is still a lot of data to be reported ahead of the meeting such as GDP, PMIs, CBI surveys, consumer confidence, household income, borrowing, industrial production and more. Clearly, Carney’s point is that while recent data weakness might be weighing on policy maker’s support for a rate hike currently, incoming data could still change this view.
Clearly incoming data between now and the May meeting is going to be all important. If any further negative surprises can be avoided, the BOE should still be on course to raise rates and Carney’s comments on the May rate hike can simply be seen as a way of buying himself some deniability heading into the meeting if policymakers do rule in favour of keeping rates unchanged. Carney has long been accused of being a “bad boyfriend” in the sense that he is unreliable and often goes against prior communication, so his comments here might be in the interests of damage control.
The sell off in GBP last week saw price breaking down below the supporting trend line of the bullish channel running from mid-2017 lows. If price remains below the channel there is scope for a run down to test deeper structural support at the 1.3215 – 1.3662 level which is the broken September 2017 high.