Carney Relents on Rate Hike

MPC to “debate rate hike”

In a U-turn Donald Trump would have been proud of, Bank of England Governor Mark Carney yesterday relented on the need for tighter monetary policy in the U.K.

Speaking at an ECB conference in Lisbon, Mr Carney said that “on balance, an interest rate hike is probably necessary and the Bank will discuss this in the coming months”. They will concentrate on whether stronger business investment is offsetting weaker consumption. The issue of strong employment data versus weak wages growth makes the MPC’s discussion and subsequent vote a major turning point.

Sterling rallied strongly against the dollar and Euro reaching 1.2976 and 0.8771.

It would be difficult to imagine a more tacit hint from the normally more cautious BoE Governor but there is a long way to go between a comment that rate hikes will be discussed to an MPC vote in favour despite last week’s narrowing of the vote from 7-1 to 5-3 in favour of leaving rates unchanged.

Inflation concerns need to be addressed and without specifically mentioning it, the speech was clearly designed to calm those who are concerned about the Central Bank being “behind the curve”.

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Dollar suffers as ECB and BoE play catch-up

The United States Federal Reserve is in danger of being “found out” as it toys with the idea of further interest rate hikes in H2 to complement those already having taken place.

It is clear that there is no necessity for monetary policy to be tightened further in the U.S. and any hike in the short term will be a move to “cool off” the advances in the equity markets. The Dow Jones Industrials appears to have finally found a high having tried and failed to break and hold above 21,500 several times recently.

Recent comments from Fed officials had supported Janet Yellen and her tightening strategy. It was perhaps significant that the first dissenting voice, that of Neel Kashkari, President of the Minneapolis Fed, has come at such a critical moment.

The dollar index, which had rallied following Yellen’s more hawkish comments earlier in the week fell back as the possibility of the narrowing of the interest rate differential sunk in.

It reached a low of 95.76, a fall of a little over 2% from its highs a week earlier.

Political fog clearing a little in the U.K.

Sterling received a further boost yesterday following the interest rate hike comments from Mark Carney.

In the first vote held in Parliament since the Government lost its majority, a bill to drop the 1% pay cap for the police, fire and ambulance services was defeated by 323 votes to 309. It seems that even without the support of Northern Irish MP’s, all of whom voted with the Government, Theresa May would have “squeaked home”.

The opposition Labour Party is working hard to take the moral high ground implying that recent terrorist incidents and the “tower block debacle” following a tragic fire two weeks ago are being exacerbated by the Government’s austerity measures.

Sterling has now risen by 3% over the past week against the dollar and is now within reach of the psychologically important 1.3000 level. The MPC’s fight with inflation will be aided by a stronger pound but this may take some months to be seen and there are plenty of potential pitfalls still to be negotiated.

The pounds performance against the Euro has also been encouraging, managing to “hold its own” as the common currency has surged following more hawkish comments from the ECB President.