Bank of England Governor Carney’s comments undermine Sterling
In a speech on Tuesday, Bank of England Governor Carney stated that now was not the time to raise interest rates. He justified his stance on the grounds of anemic growth rate in wages together with mixed signals on consumer spending and business investment. Carney also stated that domestic inflationary pressure was still subdued.
Over the coming months, the Governor wanted to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm and how the economy reacts to tighter financial conditions triggered by EU Exit negotiations.
A key element would also be the developments surrounding expectations of both households and companies during the Brexit negotiating process.
Overall, according to Carney, monetary policy would be set to return inflation sustainably to target while supporting as best it can the necessary adjustments in the economy. In other words, Carney wants to keep interest rates as low as possible.
There were no significant warnings over the inflation outlook which will also cause some concerns that tolerance to higher inflation has increased.
Sterling gained support last week from the 5-3 Bank of England vote to keep interest rates on hold which increased speculation over a potential rate increase.
Carney can of course be out-voted on the committee, but his comments indicate that he will resist any move to raise interest rates in the short term.
Sterling weakened sharply after the comments with GBP/USD sliding to one-week lows near 1.2660 from 1.2740 as EUR/GBP pushed higher to 0.8800. This take Sterling one step closer to being one of the most volatile currency again, like it was in 2016.
Selling pressure was also triggered by weaker oil prices and a warning from ratings agency Standard &Poor’s that the credit rating was likely to be downgraded.
Sterling will still be subjected to very volatile trading conditions with patience needed in the timing of both sales and purchases. Levels near 0.9000 would be attractive to sell Euros.
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