Governor of the Bank of the England spoke at the University of Sheffield Advanced Manufacturing Research Centre and dampened market expectations of policy tightening. Carney explained that the Bank expected interest rates to return to target (2%) within 2 years, which is significantly higher than January’s record low reading of 2%.
The rhetoric from MPC members has been confusion for traders attempting to gauge the expected timeframe of policy tightening. UK interest rates have remained at the record low of 0.50% for 6 years, and after today’s speech, traders are expecting this to be unchanged for the rest of 2015.
Divergence with the US
The UK’s main trading partner, the Eurozone, has just announced its third round of quantitative easing with the risks of a Greek exit weighing on investors. The US is expected to raise rates as soon as June, as Yellen attempts to guide the economy away from loose monetary policy. The UK economy is picking up, with a tightening labour market and strong PMI indicators. The divergence between the tightening schedule in the US and UK is one the reasons that some analysts are predicting for cable to move lower. The UK it seems is caught between both countries, geographically and economically, with the uncertainty overhanging the single currency and a general election in the UK, Sterling’s strength might be unfounded.
Sterling traded to a 7 year high versus the Euro on Wednesday, predominantly on Euro sentiment, as investors sold the currency. EURGBP traded down to 0.70316 (GBPEUR: 1.4212) before recovering to above 0.70 during the European session on Thursday. The rapid decline in the value of the Euro is a benefit for exporters within the single-currency; however the pace of the move lower could be unnerving for policy makers. The calls for parity in EURUSD are being brought forward, as sentiment feigns.
Link to the full speech by Carney “Writing the path back to target”