Why pound sterling creates a headache for BOE's Carney

Why pound sterling creates a headache for BOE's Carney

5 August 2015, 10:14
Alice F
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Bank of England's governor Mark Carney wants investors to get ready for tighter monetary policy. However, analysts warn him from overplaying his hand on Thursday talking about higher U.K. interest rates, as it may send the pound soaring, which is harmful for the U.K. economy.


Policy makers will vote on Wednesday and announce their decision, as well as publish their Quarterly Inflation Report, at noon in London the following day. 45 minutes later, Carney will begin his press conference.

Analysts now predict that the nine-member Monetary Policy Committee that last time voted to leave rates unchanged this time will have at least two defectors who will seek higher rates. Anticipating new hawks, the pound outperformed its closest peers over the past month, which produced a harmful impact on exporters.

“Carney is unlikely to sound ever more hawkish, because to do so could be self-defeating,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London.

“Their chances of getting to that first hike are helped if they can tiptoe carefully toward it. If they charge ahead and say we’re going to be raising rates by the end of the year, sterling will have gone up another 5 percent, making it impossible.”

Sterling was the only currency of 16 major ones to appreciate against the U.S. dollar in the past three months, even as most economists predict the Federal Reserve will be the first to raise its key rate.

Stephanie Flanders, the London-based chief market strategist at JPMorgan Asset Management, considers that although the strength of economic data may support the case for U.K. officials to move before the Fed, a higher pound is likely to hold the bank back.

“It is much more of a factor for the U.K. We’re a much more open economy, it has a much more direct effect on inflation, on the Bank of England’s forecasts.”

As a vivid example, manufacturing data on August 3 provided fresh evidence of the currency’s pressuring effect on orders from the U.K.’s biggest trading partner, the euro area, where, according to Markit Economics, factories saw export demand fall for a fourth month in July.

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