Bank of England Governor Mark Carney signals rate rise closer

Sterling jumped by more than a cent against the dollar to $1.2952 in response to his words, the highest since 24 May

(EPA)

The Governor of the Bank of England, Mark Carney, has raised the prospect of the removal of some UK monetary stimulus, sending the pound up sharply.

Speaking at a European Central Bank forum in Portugal, Mr Carney seemed to strike a more hawkish tone than in recent comments, saying “some removal of monetary stimulus is likely to become necessary if the trade-off facing the [Monetary Policy Committee] continues to lessen and the policy decision accordingly becomes more conventional”.

Sterling jumped by more than a cent against the dollar to $1.2952 in response to his words, the highest since 24 May.

Some in the market said the move was an overreaction.

“Investors were uninterested in the nuances of what Carney was actually saying,” said Connor Campbell of Spreadex, stressing that the Governor had also caveated his remarks by saying that he would want to see growth in UK wages and business investment.

Mr Carney said: “The extent to which the trade-off moves in that direction [of a rate increase] 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.”

A lift for the pound

Reuters Eikon (EPA)

Nevertheless, the comments, which came after the Bank of England's chief economist, Andy Haldane, surprised traders earlier this month by saying he was ready to raise rates, having previously positioned himself at the dovish end of the spectrum on rates, were interpreted as signalling a shift in the overall MPC orientation.

The MPC split 5-3 earlier this month over whether to raise rates from 0.25 per cent to 0.5 per cent.

In that vote the Governor and Mr Haldane both voted to hold. The three members in favour of a rate hike were Michael Saunders, Ian McCafferty and Kristin Forbes. Ms Forbes is leaving the MPC and will be replaced at the next meeting in August by Silvana Tenreyro.

At his Mansion House speech on 20 June, the Governor had said that, in his view, it was “not yet the time” to start raising rates, comments which had sent sterling down.