View the article online at http://citywire.co.uk/money/article/a874780
Pound slumps as Carney rules out rate rise for now
Pound falls to seven-year low against dollar as Bank of England governor says 'now is not yet the time' for rate rises.
The pound has dropped back to a low last seen in 2009 versus the dollar and a year low against the euro after Bank of England governor Mark Carney ruled out any imminent increase in interest rates.
Having traded at $1.70 as recently as 2014, sterling dropped to $1.414, its lowest since early 2009, following Carney’s warning that he did not have a ‘set timetable’ to raise interest rates.
Despite the US Federal Reserve in December finally breaking its near-decade run of borrowing costs effectively at zero, he added that slowing global growth and political uncertainty would delay a Bank of England hike.
The timetable for a planned referendum on the UK's continued membership of the European Union has been rapidly bought forward to a likely date in the autumn of this year, overshadowing monetary policy.
Delivering the annual Peston Lecture at Queen Mary University, Carney said: ‘Private and public balance sheets remain stretched. The global environment is unforgiving. And the supply side of our economy is still healing.
‘Last summer I said that the decision as to when to start raising the bank rate would likely come into sharper relief around the turn of this year.
'Well the year has turned, and, in my view, the decision proved straightforward: now is not yet the time to raise interest rates. This wasn’t a surprise to market participants or the wider public.
‘They observed the renewed collapse in oil prices, the volatility in China, and the moderation in growth and wages here at home since the summer and rightly concluded that not enough cumulative progress had been made to warrant tightening monetary policy.’
Writing ahead of the speech, Societe Generale’s head of cross asset research Patrick Legland suggested that the economic risks of an exit from Europe would likely delay a rate decision.
‘The Bank of England is likely to stay in “wait-and-see” mode and avoid hiking rates until the referendum is over and done with,’ he said. ‘Due to this divergence between the Bank of England and the Fed, short term rates have started to de-correlate. Wider interest rate differentials and growing Brexit fears have triggered sharp pound depreciation in recent months.
‘Societe Generale foreign exchange strategists expect further sterling depreciation ahead of the referendum, with $1.35 a realistic target. In case of a “leave” vote, looser monetary policy and capital outflows could weaken the [pound] even further.'
The speech followed data showing a 0.2% rise in consumer price inflation in December, widely interpreted as suggesting that deflationary pressure was passing.
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by Gavin Lumsden on Oct 23, 2016 at 00:01