Sterling falls off a cliff as Bank of England keeps interest rate hike at bay
Mark Carney’s Bank of England pushed sterling off a cliff yesterday by suggesting that interest rates could stay anchored to their historic low until 2017.
Having said earlier in the year that a rate hike could come towards the end of 2015 or start of 2016, the Bank’s governor appears to be diverging from the position of US Federal Reserve boss Janet Yellen.
The dollar jumped this week when Yellen and two of her Fed colleagues pointed to a “live possibility” of a US rate hike next month.
Many analysts have expected the Bank to follow the Fed’s lead and tighten monetary policy sooner rather than later, but yesterday’s trio of publications – dubbed Super Thursday – was surprisingly dovish.
“The path for Bank rate implied by market rates has fallen by around 40 basis points [since August], such that it only reaches 0.75 per cent in 2017 quarter two,” said the Bank’s inflation report.
Economists at Threadneedle Street believe there is little chance of inflation breaking significantly above the two per cent target, even if interest rates are held down until 2017.
The pound dropped sharply on publication of the inflation report, along with the minutes of its latest interest rates decision. Having printed $1.539 at noon, it dropped to around $1.521 last night.
Only one member of the monetary policy committee, former CBI economist Ian McCafferty, voted for a hike.
Read more: Bank of England lowers UK growth outlook
“On the back of the Bank’s Q&A session there is now a more clear cut divergence of opinion between the Bank and the Fed as to how enabled markets and consumers are to absorb an increase in interest rate rises,” said IG market analsyst Alastair McCaig.
The difference between the Bank’s perspective and that of the Fed can be observed in their judgement of global conditions, including fears of a slowdown and further volatility in China.
“After a hawkish testimony by Fed chair Yellen… in the wake of FOMC minutes no longer containing reference to external risks, the Bank chose to reiterate those same risks and sounded impressively down beat,” said Accendo Markets’ head of research Michael van Dulken.
Meanwhile last night, governor Carney refused to rule out the prospect of him serving more than the five-year term that he agreed in 2013.
“I'm not even half way into my five years so it’s far too early to answer that,” Carney told Bloomberg TV. Bank governors typically serve eight-year terms, but Carney was granted a five-year term by chancellor George Osborne.