By Neil Wilson, ETX Capital
Sterling leapt above $1.29 to its strongest in three weeks after a surprising intervention from Bank of England governor Mark Carney, while continued dollar softness offered further support.
The merest hint of removing some accommodation lifted cable past $1.2970 and the pound is now well clear of the sub-$1.26 level it traded at a week before. Resistance at the psychological $1.30 barrier will be significant. Upside may be capped in the near term as Mr Carney has not signalled that the Bank is ready to tighten, only that there is an active debate taking place within the MPC - something that the increasingly public nature of the discussions unhelpfully betray.
Seeking to clarify remarks made lately, Mr Carney said he would back a rate hike if business investment and wages started to improve. Coming off the back of the 5-3 split at the last meeting and hawkish comments from the Bank’s chief economist, Andy Haldane, it’s the clearest signal yet that the Bank is minded to tighten. There is a sense the MPC may wish to ‘correct’ its rate cut last summer in light of a surprisingly resilient UK economy and rising inflation, which is accelerating quicker than the Bank expected.
But as with Mario Draghi’s remarks (which were misinterpreted by the market as being hawkish), Mr Carney offered little that is fundamentally new. We know the MPC’s tolerance for above-target inflation is limited and falls as spare capacity erodes. We know there is dissent in the MPC.
Nevertheless, this was the most explicit signal that we are close to reaching the point at which a hike would be warranted. There does appear to be a decided tilt towards a tightening bias, should economic conditions improve. It’s a case of justifying why they shouldn’t tighten rather than why they should, which appears to be a material shift from first few months of the year.
He said some removal of stimulus might be needed soon but this depends on a number of factors – business investment, firmer wage growth and more generally how the economy fares in light of Brexit negotiations and tighter financial conditions. A tentative signal from the government to end the public sector wage cap and a loosening of austerity measures may also be playing into this move.
But the picture is now pretty muddy. Only last week Mr Carney said ‘now is not the time’ to tighten. Deputy governor John Cunliffe said only today that there is no rush to raise rates. So we are left guessing – the MPC does not seem to know where it’s at and the debate is taking place in public. This ought to play out in more vote splits over the summer before a move to ‘correct’ its policy mis-step perhaps by the autumn, assuming economic growth and wage growth holds.
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