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Currency markets buoyed amid interest rate rise speculation

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Written by: Samantha Partington
29/06/2017
The suggestion by the governor of the Bank of England that a change in monetary stimulus may be needed has propped up currency markets as they assume an interest rate rise may be on the horizon.

Mark Carney, the Bank of England governor made the comment during a speech to the European Central Bank.

He said: “Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC [Monetary Policy Committee] continues to lessen and the policy decision accordingly becomes more conventional.”

The MPC met earlier this month and voted five to three in favour of maintaining the Bank Rate at 0.25% signifying a warmer attitude to a change in interest rates.

Michael Baxter, economics commentator at The Share Centre, said the MPC surprised ‘just about everyone’ when three members of the committee voted to increase interest rates. “[It is] the closest the country has been to a rate hike since the days of the financial crisis,” he added.

Carney said the MPC’s decision to hold, had been made because it was not clear how long the slowdown in growth would last.

Growth slowed from 0.7% in quarter four last year, to 0.3% in Q1. Carney said given the mixed signals on consumer spending and business investment, during the last meeting, it was too early to judge with confidence how large and persistent the slowdown in growth would prove.

He said that as domestic inflationary pressures, particularly wages and unit labour costs, were still subdued, it was appropriate to leave the policy stance unchanged at that time.

In his latest speech, this view appears to have changed. However, Carney lists conditions which would have to be met for this to happen.

He said: “The extent to which the trade-off moves in that direction [towards a removal of monetary stimulus] will depend on the extent to which weaker consumption growth is offset by other components of demand including business investment, whether wages and unit labour costs begin to firm, and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit negotiations.

“These are some of the issues that the MPC will debate in the coming months.”

The Share Centre’s Baxter, said: “Mr Carney did say that [some removal of monetary stimulus] was dependent on conditions, but the implication is clear: the MPC is shifting its emphasis. UK rates are unlikely to rise in August, when the MPC next meets, but an increase before year-end is a distinct possibility.

The FT reported that his comments caused currency markets to assume a rate rise was on the way, driving sterling up 0.4% against the dollar. The FT’s report states that Bank of England staff insisted the governor had not changed his mind, on now not being the right time to raise rates.

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