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Pound strengthens as Carney revamps rates pledge
by Chris Marshall on Feb 12, 2014 at 11:54
(UPDATE) The pound leapt as a shift in the Bank of England’s ‘forward guidance’ plans for interest rates left financial markets questioning how long rates would remain at rock-bottom.
UK unemployment will probably have hit the Bank’s 7% guidance threshold for raising rates this spring, but low productivity is likely to delay tighter policy, said governor Mark Carney as he attempted to convince consumers, businesses and markets that interest rates would remain at 0.5% until the recovery is sustainable.
In its Inflation Report, the bank pointed out that ‘robust’ economic growth had not yet begun to erase the UK’s economic productivity gap.
Having seen its attempts to steer rate expectations derailed by unexpected growth, the Bank refrained from providing specific numerical signposts for a rate rise. Carney instead outlined a range of measures that would be monitored.
James Knightley, an economist at ING Bank, said ‘the strength of the growth story coupled with the robustness of the labour market means that the BoE are likely fighting a losing battle in convincing markets that rate hikes are a distant prospect.’
The pound, flat before Carney spoke, was trading 0.5% higher at $1.6536. Share markets meanwhile remained positive (FTSE 100 up 0.2% at 6,685).
Fed ‘continuity’, China trade sustains FTSE winning streak (08:15)
Confirmation that the new chief of the US Federal Reserve won’t fiddle with existing stimulus policy, coupled with signs of improvement in China’s economy, helped global stocks higher, with London’s benchmark FTSE 100 heading for its sixth consecutive day of gains.
Although new Fed chair Janet Yellen confirmed to US Congress that the steady reduction of US asset purchases would continue, gradually removing the stimulus that markets crave, she provided the next best thing for investors: certainty.
The result of Yellen’s expectations of ‘continuity’ in monetary policy, ‘likely’ reducing the pace of asset purchases at each of the Fed’s policy meetings as it started to do in December, was a rally on Wall Street, followed higher by Asia overnight and Europe this morning. Britain’s FTSE 100, which rose 1.2% on Tuesday, was up 0.2% to 6,686.
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