Carney turns hawkish and sends sterling sky high
13th June 2014
Mark Carney Speech – 12/06/14
Despite the fanfare, Mark Carney’s call for ‘sooner’ rate hikes was not based on a bounding UK economy. The Bank of England Governor still sees the degree of spare capacity as 1-1.5% and forecasts that growth will slow into the second half of the year. In his speech, Carney stressed that the UK economy not only has all the imbalances as it used to, but some emerging new ones from a highly indebted private sector.
Carney had consistently said that containing housing market instability was the job of the Financial Policy Committee and that monetary policy was a last line of defence. However, while George Osborne granted the Bank of England a raft of new rules to rein in the housing market, the legislation unhelpfully won’t be passed until next year. It looks like dealing with the housing problem is now back in Carney’s court as the use of macro-prudential rules is tied up in bureaucracy.
There is also a new flashing red light on Carney’s dashboard of economic indicators – the emergence of significant overseas borrowing. The Eurozone’s ultra-low borrowing costs are encouraging the UK private sector to borrow abroad, but the appreciation in sterling-euro cross means these debts could be multiplied, putting private sector debt levels at severe risk.
This is Carney’s first hawkish statement since coming to power and reflects a likely shift in outlook at the Monetary Policy Committee, which has been showing signs of growing division over spare capacity and rate rises for several meetings now. Carney’s comments are likely the precursor of the first official vote for higher interest rates and all eyes will be on the voting ratio in next week’s minutes.
Sterling-dollar has seen some consolidation in recent days as sterling long positions took profit, but with the BoE emerging as the first leading central bank to hike, the only way for the pound is up. While sterling-dollar looks set to break $1.70 during the summer, the biggest impact of a stronger pound will be in the euro-sterling cross where the divergence in monetary policy is most pronounced. A dovish ECB against a hawkish BoE is an easy play for currency trades and euro-sterling should stay beneath £0.80 in the near-term.