Here we are again at 1.70 after Mr Carney decided that he didn’t mind if the value of the pound was higher. So much for worries about the high exchange rate affecting the UK economy it seems.
So what shook the pound? Here’s a repeat of the slice of the speech that did the damage;
“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced.
It could happen sooner than markets currently expect.
But to be clear, the MPC has no pre-set course. The ultimate decision will be data-driven. At this point it is safest to conclude, as the MPC has, that there remains scope for spare capacity to be used up before policy is tightened and that a host of labour market, capacity utilisation and pricing indicators should be watched closely to determine how that slack is evolving.
Growth has been much stronger and unemployment has fallen much faster than either we or anyone else expected at last year’s Mansion House dinner. So far this has been largely matched by indicators which suggest that there is more supply capacity in the labour market than we had previously thought.As a result of these two welcome developments, despite rapid jobs growth, pay pressures and unit labour cost growth have remained subdued.3
The MPC expects the rate at which slack is being eroded to slow during the second half of this year as output growth eases and productivity growth recovers.But thus far there are few signs of a deceleration in output growth. And a challenge in deciding when to begin normalising policy is that actual output can be observed but potential supply cannot. That is why the MPC is monitoring a broad range of indicators including coincident ones such as the behaviour of wages and prices. Of course navigating the upcoming bend in the river isn’t the end of the journey. The MPC has rightly stressed that the timing of the first Bank Rate increase is less important than the path thereafter – that is, the degree and pace of increases after they start. In particular, we expect that eventual increases in Bank Rate will be gradual and limited.“
The green and red highlight the hawkish/dovish bias I see in the passage. That may add some balance to the comments.
It matters not though right now as the market has taken the headline to the bank and that’s put the pound where we are now. The fact that the recovery seems to be exceeding the BOE’s expectations could be one reason why Carney decided to prime the market but it’s strange that he chose to do so when he did, and obviously knowing what the consequences would be i.e a higher pound.
One could say that it was inevitable as we know rate rises are coming. Even so the remarks could set cable on another big leg higher which, if we take the BOE’s rhetoric to heart, is a negative for the economy. Again, why do it?
Now I’m not a big one for conspiracy theories but I had a crazy thought this morning and when I checked it out it the pieces fit my thoughts.
I’ll throw it out to you and you can decide whether I’m nuts or not.
If the UK starts seeing inflationary pressures building from the recovery then quicker and potentially more rate rises will be expected by the market. That will go against the BOE’s wishes of a slow and gradual return to normal interest rate levels. It will put them in the middle of very difficult situation between fighting price pressures and sending the population into turmoil with debt payments.
So what’s the best way to keep inflation under control while not troubling the citizens with steep rate rises? Our very own Mr Draghi has the answer, after all, he’s stated that the strength of the euro has been one of the big factors behind lower inflation in the eurozone.
My crackpot theory is that Mr Carney might use sterling strength to undermine any inflation pressures thus leaving the plan for rates intact. He could just be sowing the seeds now for inflation down the road. At some point, with unemployment continuing to fall, wage growth will pick up and that will kick up inflation. Remember, the BOE can’t do anything about the big price factors like energy and food but we can combat home grown inflation.
And what clue did I get to add to my theory? Very close to his speech last night, on Tuesday we have our latest inflation numbers. Has Mr Carney already seen the data and sees something he doesn’t like?
Using sterling to contain inflation, is it as crazy as it sounds?
