BoE Carney Speaks to IMF

Discussion and Analysis by Charles Porter:

Last week, the minutes published following the Monetary Policy Committee’s Decision rallied the pound sterling. This event triggered an appreciation of the Pound Sterling contributing to intraweek gains in excess of 3 percent. Moreover, the Hawkish conclusion delivered by Gertjan Vlieghe, a traditionally Dovish Committee member, signalled a sooner-than-expected rate hike that in turn cemented and developed these gains. However, Carney’s speech today was unable to re-value Sterling.

The analysis of Gertjan Vlieghe’s speech reveals that markets reacted strongly to the following inclusion:

“If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months.”

The above quotation conforms almost perfectly to the minutes of the Monetary Policy Committee’s minutes-guidance. Sterling appreciated on the back of this speech because it demonstrated Committee-wide concurrence even amongst the more hike-averse members. Therefore, should Carney place more emphasis to an imminent hike or deliver a more Hawkish conclusion, then a further appreciation should be expected to prevail. However, presumably, so long as Carney did not deliver an outstandingly Dovish message, Sterling should maintain its gains and price out any risk of intra-Committee disagreement.

Mark Carney, Governor of the Bank of England, delivered a speech to the International Monetary Fund this afternoon at 16:00 BST. Although offering an abridged version to the Fund and their guests, the full publication was available at 4pm and thus currency market movements after this time should reflect, at least in part, Carney’s speech.

Validating the above expectations, Carney did side with the Monetary Policy Committee, suggesting that:

“As the Committee stated last week […] some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.”

However, the Pound Sterling did not appreciate at all against other currencies, including the Euro and the Dollar. This may perhaps be because Carney did condition against this conclusion:

“Any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent[…]”

Therefore, if markets had, arguably unreasonably, predicted a stronger monetary policy tightening, Carney’s words may have cased investors to sell off the currency. This is because the gains that they anticipated, which derive directly from a higher interest rate, may not be realised. Ultimately, the next monetary policy Decision at the beginning of November will prove, or disprove, the Committee’s intentions to raise interest rates.