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BOE Governor Sends the Sterling on its Way Down

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June 21, 2017 By: , No Comments

The all-share UK index, the FTSE 100 is currently trading at 7,472.71, down 0.68% or 51.10 points. The cable (GBP/USD) is trading at 1.2622, down 0.91% on the day. The current level of the pound is its lowest in 2 months, thanks largely to the dovish expectations of Governor Mark Carney. The Bank of England (BOE) decision to maintain the bank rate at its current level depressed the GBP further, helping it to weaken considerably against its peers. When the UK Prime Minister called for snap elections on June 8, she didn’t anticipate an outcome that would weaken the Conservative party’s position in Parliament. Many currency traders were anticipating a sharp rise in the GBP after the election. Had the Prime Minister won more votes, the GBP/USD pair would likely be trading above 1.30 by now.

‘… Now is not yet the time.’                 BOE Governor Mark Carney on raising the bank rate

Brexit negotiations have already begun in earnest. Brexit secretary, David Davis described the mood as cautiously optimistic and stressed that it’s not how talks begin but how they end that matters. Now that the government of the UK is considerably weaker, the EU may be negotiating from a position of strength on their part. The recent declines in the GBP have less to do with the political foibles of Prime Minister May and her European partners, and more with the macroeconomic instability currently racking United Kingdom. For one thing, inflation has risen sharper than anticipated, reaching 2.9%. This does not bode well in an economy where real wages remain stagnant. Not only does this eat into the disposable incomes and buying capacity of folks in the UK, it has the effect of reducing GDP from quarter to quarter. When the Bank of England governor commented that it was not the right time to increase interest rates, currency traders wasted no time selling the GBP.

Hawks on MPC Rising but Doves Maintain Majority

At the recent meeting of the Monetary Policy Committee (MPC), the vote went 5:3 in favour of maintaining the bank rate at its current level. The current interest rate in the United Kingdom is 0.25%, and this vote was locked in on June 15, 2017. The next time the Bank of England meets (Wednesday, 21 June 2017), it will be for the FPC meeting. This will be followed by the speech by Haldane. Mark Carney is concerned that rising inflation may be impacted negatively by rising interest rates. Carney is waiting for the impact of Brexit negotiations to filter through the UK economy before he imposes monetary tightening in the form of a 25-basis point rate hike. Perhaps the most important takeaway from the split decision on interest rates at the MPC is that one of the MPC members will be leaving her position shortly and she will be replaced by another dove on monetary policy. The UK economy has seen a sharp uptick in bond buying since the Brexit decision sent the pound plunging to a 31-year low. Barclays Bank analysts do not believe that the Bank of England is using all resources at its disposal. In their opinion, the BOE is positioning itself in case inflation rises too sharply. One way to combat runaway prices is to raise the interest rate to drain liquidity from the system.

For now, the BOE will not curtail its monetary stimulus policy that has been in place since August 2016. Rising prices and tightness in real wage growth remains a concern and further economic data is required to gauge the direction of monetary policy.

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Brett Chatz

About Brett Chatz

Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.

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