Pound plunges after Bank of England's dovish rates signal

Central bank revises its growth forecast for UK economy

Mark Carney
Governor of the Bank of England Mark Carney
(Image credit: Getty)

Has Carney scotched another interest rate cut?

26 October

Sterling went on another wild ride yesterday, spurred on by a "febrile" backdrop fuelled by fears of a hard Brexit, says the Financial Times.

The pound fell one per cent to reach $1.2083 ahead of an appearance by Bank of England governor Mark Carney before a House of Lords committee on Brexit – and then recovered to close back above $1.22 after he directly addressed the pound's recent weakness.

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In particular, says the Daily Telegraph [2], Carney indicated the "inflationary impact" of the currency's slump "could encourage him to vote against any further interest rate cuts".

Ultra-dovish commentary published after the monetary policy committee's September meeting had prompted speculation of another base rate cut next week, taking it to a new record low close to zero.

Carney at first appeared to stoke such rumours, saying the market's so-far negative view of the Brexit process, which has driven the pound down 18 per cent against the dollar, could be "mistaken".

As with previous comments that the bank would "look through" an overshoot of the two per cent inflation target, this could have pointed to more stimulus to boost the economy, irrespective of its effects on the exchange rate.

But Carney added that stimulus "has its limits" and although the committee is "not a targetter of the exchange rate", it is also "not indifferent to the level of the exchange rate".

The pound's recent fall is "undoubtedly something we will take into account over the course of the next week", he added, a comment some believe scotches the chance of another rate cut.

"The comments were more helpful [for sterling] than people had expected," Shahab Jalinoos, a foreign-exchange analyst at Credit Suisse, told the FT. "Think about it, if Carney had said they were indifferent."

2. http://www.telegraph.co.uk/business/2016/10/25/ftse-100-climbs-above-7000-and-pound-stuck-below-123-as-mark-car/

Carney: 'Not our job to fix consequences of low interest rates'

07 October

Mark Carney has dismissed criticism that the Bank of England's ultra-loose monetary policy has hurt ordinary savers at the expense of already wealthy asset owners.

That's not to say that Carney disagrees with the view of the Prime Minister Theresa May or the former chancellor George Osborne that the bank's policies have had "distributional consequences". He simply insists that it's not up to the bank's policymakers to fix them, says The Guardian.

Speaking ahead of the International Monetary Fund's annual meeting in Washington yesterday, Carney said: "Every monetary policy, every monetary action has distributional consequences. It is not for the central bank to address those… It is for broader government to offset them."

Economists have long argued that ultra-cheap money creates asset bubbles.

Earlier this month Osborne, who as chancellor oversaw a prolonged period of declining public spending and loose monetary policy, waded into the debate when he said in an interview that monetary stimulus "makes the rich richer and makes life difficult for ordinary savers".

In her closing address to the Conservative Party conference this week, Theresa May similarly railed against a reliance on" super-low interest rates and quantitative easing" to boost the economy, saying people with assets "had got richer" while those without "have suffered".

Many reports tried to work the comments up into a direct attack on Carney and the Bank of England – and some even insinuated that the government could strip Threadneedle Street's independence.

The truth is May has been in favour of loose monetary policy, a stance that remained consistent even after the Brexit vote. Her recent criticism of it is an attempt to shift the new government's focus on to fiscal policy and justify an increase in borrowing and spending.

Carney would be an enthusiastic fan of this, having hinted at the need for fiscal stimulus on a number of occasions. In the wake of the Brexit vote in June he even said there are "limits to what the Bank of England can do".

He added: "I have long said that monetary policy has been overburdened. There needs to be a better balance of monetary policy, fiscal policy and structural policy."

Interest rates could be cut again despite good post-Brexit data

6 October

Interest rates could be cut further despite the broadly positive economic data since the Brexit vote.

Ben Broadbent, the deputy governor for monetary policy at the Bank of England, said policymakers have to "balance the short-term data against the medium-term outlook".

In short, he believes economic data in recent weeks, which have shown stronger services and manufacturing sector growth figures and much improved consumer confidence, do not reflect the uncertainty surrounding post-Brexit trade.

"We know there is an effect coming, we know the world looks potentially very different. We're pretty confident that the effect of that uncertainty will weigh on investment," he told The Times.

In separate comments to the Daily Telegraph, Broadbent added that the "lack of clarity… needn't result in visible, headline-grabbing closures of productive capacity". Instead, "the effect is likely to be more insidious: decisions to expand, that might otherwise have been taken, are delayed".

The Times says the comments are significant as they appear to mark a departure from the "data dependent policy" championed by Bank of England governor Mark Carney for the past two years.

All of this could spell another cut in rates to close to zero before the end of the year. Rate-setters cut the base rate to a record low of 0.25 per cent in August and last month stated openly that another cut is being considered.

Broadbent admitted there is a limit to the capacity of monetary policy to boost the economy, but said the bank has "run out of ammunition" and controlling inflation, which could rise due to a slump in the pound, "can help".

He also dismissed criticism from the likes of former chancellor George Osborne – and Prime Minister Theresa May yesterday – that loose monetary policy has only served to make the rich richer.

"When you talk about the rich, you are often talking about older people who happened to buy their home 25 years ago and then if you are also talking about people worrying about their savings income, often those are in the same groups," he said.

"So there is not some independent group called the rich who benefited and some other group called savers who have lost out."

George Osborne: Low interest rates made rich richer

28 September

George Osborne has admitted that loose monetary policy put in place by central banks, typified by ultra-low interest rates, "makes the rich richer and makes life difficult for ordinary savers".

The former chancellor was speaking in a televised interview with Bloomberg as he sought to explain the rise of populist politics in the UK and the US, which led to the shock Brexit vote this summer and could yet propel controversial businessman Donald Trump to the White House.

However, he said he supported the "very necessary" central bank measures and in particular praised the Bank of England and its governor, Mark Carney, for implementing the "right policy mix" in the wake of the EU referendum.

The bank's first post-Brexit vote meeting in August saw it cut rates to a new record low of 0.25 per cent and unleash £170bn of fresh monetary stimulus. This month, rate-setters hinted a further reduction in rates to close to zero is likely before the end of the year.

Several economists have long complained that ultra-low borrowing costs merely have the effect of boosting the flow of money into assets such as property, creating a "bubble".

At the same time, the move gives pitiful returns on cash savings or other safe investments, while central bank bond buying undermines the growth potential on pension and insurance funds, leaving a sizeable funding shortfall.

In parallel with all this, wage growth is languishing at well below pre-financial crisis levels and many in the lowest income groups have found themselves worse off in "real" terms after inflation.

The solution, said Osborne, was not "stopping that policy" or "closing off your economy, closing off your free markets, blocking enterprise.

"But we do need to make sure the rewards are more widely shared," he added.

"I was a Conservative chancellor but I increased the national minimum wage to create a 'living wage', because I think it's important that people who work in a capitalist system see the rewards of that work - and there are plenty of other examples we need to look at."

Is the Fed inching closer to another interest rate rise?

22 September

The US Federal Reserve has "marked another chapter in the most glacial rate-raising cycle in recent times", says the Financial Times.

Rate-setting committee members talked up the chances of an interest rate hike at the Fed's two-day meeting this week, but ultimately voted to hold them at their near-zero target rate of 0.25-0.5 per cent.

The bank inched base rates up by 0.25 per cent last December, predicting four more rate rises would come before the end of this year.

Despite steady, albeit not stellar, economic growth in the US and a jobless rate that has prompted economists to say the country is at "peak employment", turmoil in the global economy and persistently low inflation have persuaded the Fed to leave rates unchanged since then.

"The economy has a little more room to run than might have previously been thought," chairwoman Janet Yellen said yesterday. "That is good news."

However, the Fed is widely thought to be inching towards a second rise in interest rates before the end of this year.

Yellen attempted to "keep dissent to a minimum", but the September vote was far from unanimous. The BBC says the three votes for an increase marked the biggest split among voters on the committee since December 2014.

The US central bank also said it sees near-term risks to the economy as "roughly balanced", the first time it has used such upbeat wording since late last year, before its last rates rise.

The majority of committee members also say they expect one increase before the end of the year.

Luke Bartholomew, an investment manager for Aberdeen Asset Management, said the Fed was "setting the stage" for a rise at the December meeting. Few expect an increase at the next get-together in November, which comes immediately before the US presidential election.

But a 2016 rise is "by no means inevitable", Bartholomew adds. The Fed has a recent track record of balking at the last minute and three of the ten voting committee members see no change until 2017.

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