BANK OF ENGALND GOVERNOR Mark Carney once again laid down his mark yesterday publishing the first quarterly inflation report within his control.
UK interest rates, which currently stand at 0.5%, will now be kept low until the unemployment rate falls below 7%. Therefore, the governor has taken a leaf out of the book of its counter-part, the US Federal Reserve, by now linking monetary policy to a key economic target.
However, there is a caveat to this decision. Given the fact that inflation is the central bank’s key mandate (the BoE is targeted with keeping inflation at 2%) if current levels move beyond the desired criteria then the low rate pledge will be withdrawn. So essentially, the bank could look to increase interest rates in order to cool inflation, the latest reading of which suggests UK CPI for the year is at 2.9% – above the 2% target.
Another point to take away from the announcement is the BoE’s UK growth forecast. They now expect the British economy to grow 1.6% in 2013 against 1.5% which was projected back in May. Good news for the UK.
What does this all mean for sterling?
GBP gained convincing ground as the report was published. The pound rose fully three cents versus the US dollar following the inflation report as participants digested Carney’s rhetoric. It appears market participants are somewhat relieved that Mark Carney has everything pretty much in control, outlining his intentions and targets for the UK economy. Furthermore, rates staying low for a sustained period should encourage borrowing and ultimately boost the UK economy. Indeed, Mark Carney saw huge success with this policy during his tenure as Governor of the Bank of Canada. This is all positive news for the Pound.
UK economic data has also shown a large improvement for over the past couple of months; manufacturing, services, construction, export and GDP have all met with if not beat expectations. All of this is supportive for the pound, but how long will current strength last?
The Pound is trading at the top of its range today which is affording a great opportunity to UK importers. The outlook is improved as a result of yesterday’s report, but by no means certain. There are still major downside risks to the pound and any softening of the data will lead to GBP weakness. Similarly, if the current trend of US dollar strength is to continue, exchange rates could fall back.
Carney has done a favour to UK importers. Don’t look this gift horse in the mouth.
Ikenna Chigbo is a currency consultant at Global Reach Partners