• Text size      
  • Send this article to a friend
  • Print this article

Sterling lifts after Carney's hawkish Bank rate signal

STERLING has received a boost against the dollar and euro from an apparently more hawkish signal on interest rates from Bank of England Governor Mark Carney.

The pound was trading around $1.6720 at 5pm yesterday, up 0.36 cents on its pre-weekend close in London, having hit an intra-day high of $1.6739.

Sterling also pushed the euro back below the 80p mark during the session. The euro was trading around 79.89p at 5pm, down from its pre-weekend close of 80.26p.

Mr Carney was quoted in a Sunday newspaper as saying the Bank's Monetary Policy Committee would not have to wait for a return to growth in real wages before raising UK base rates from their record low of 0.5 per cent.

This seemingly more hawkish remark contrasted with the tone of the Bank's latest quarterly inflation report last Wednesday.

This report had been viewed as dovish from an interest-rate perspective, with financial markets focusing on the Bank's move to halve its forecast of nominal pay growth this year to just 1.25 per cent.

The revised projection for pay growth is below the annual UK consumer prices index inflation rate, meaning the Bank is now projecting a fall in pay in real terms this year.

The UK's extremely slow recovery from the 2008/09 recession has been characterised by a protracted decline in real pay, which has resulted in a significant erosion of the living standards of many households.

Sterling came under pressure in the wake of the Bank's inflation report, as financial market players took the slashing of the nominal pay growth forecast as a signal that the MPC might push back the timing of the first rise in rates.

Mr Carney's latest comment signals that this might not be the case.

UK base rates have been at 0.5 per cent since March 2009.

Economists have been forecasting the first rise in rates could come later this year or in early 2015.

Labour market figures from the Office for National Statistics last Wednesday showed underlying annual pay growth lagging well behind inflation in the second quarter, at just 0.6 per cent.

Yesterday's rise in sterling came in spite of a survey from property website ┬ČRightmove showing a pa┬Črticularly sharp fall in asking prices for UK houses during August, with the drop notably steep in London, with Mr Carney's latest message exerting a more powerful influence.

In a speech at the Mansion House in London on June 12, Mr Carney said that the first rise in UK base rates "could happen sooner than markets currently expect" and warned the housing market was showing potential to overheat.

Having appeared more dovish when presenting the inflation report,his latest signal appears more in line with his Mansion House message.

Michael Hewson, chief market analyst at CMC Markets UK, said: "The waters were muddied further at the weekend when ... Mark Carney rowed back on his comments from last week by claiming he didn't necessarily need to see a turnaround in wages growth in order to raise rates. Those weekend comments will only add to the perception of a conflicted central bank. In fact it would appear that the only thing Mr Carney and the MPC are increasingly certain of is that the outlook is uncertain, and that they have no more of a clue than the rest of us, which isn't exactly comforting. If this is the case it would certainly account for the mixed messages, which is keeping the markets off balance."

Contextual targeting label: 
Finance

Commenting & Moderation

We moderate all comments on HeraldScotland on either a pre-moderated or post-moderated basis.
If you're a relatively new user then your comments will be reviewed before publication and if we know you well and trust you then your comments will be subject to moderation only if other users or the moderators believe you've broken the rules

Moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours. Please be patient if your posts are not approved instantly.

255656