BoE making no judgments about EU referendum outcome
Mark Carney said Bank of England officials have room to loosen monetary policy if needed as concerns that Britain may leave the European Union piled further pressure on the pound. "If we were in a position where the economy needed additional stimulus, we do have considerable room," the central bank governor told lawmakers in London on Tuesday. Officials have "conventional policy" such as rate cut or quantitative easing or they could "adjust" the horizon over which the BoE aims to return inflation to the 2 percent target, he said.
The pound remained near its lowest level against the dollar since 2009, after plunging on Monday. With traders already pushing back bets on the timing of a BOE interest-rate increase, the prospect of the U.K. leaving the world's largest single market is creating further uncertainty.
Policy maker Gertjan Vlieghe, testifying alongside Carney with Deputy Governor Minouche Shafik and official Martin Weale, said that if the outlook worsens, he would consider voting to cut the key BOE rate from its current record low of 0.5 percent. "I have relatively little tolerance for further downside surprises," Vlieghe told the lawmakers. "Should downside surprises continue then I think we will get rel- atively quickly to a point where I find appropriate to respond to it."
The BOE has kept its benchmark rate on hold for almost seven years. The marketyield curve shows a 25 basis-point rise is not priced in until 2019, with investors zoning in on the prospect of a lower rate.
The pound fell 0.4 percent to $1.4089 as of 12:08 a.m. London time. The currency dropped to $1.4058 on Monday. Gauges of pound volatility versus both the dollar and euro have surged to the highest levels since 2011, while the options market signaled more losses ahead for the pound.
"It's safe to say that there is an element of referendum premium" in sterling, Carney said. While recent moves in options have "spiked to levels consistent with around the height of the Scottish referendum," the persistence of the move is what matters," he said. Shafik told lawmakers that the exchange-rate changes have lagged effects so there is no mechanical link between the market moves and interest-rate policy. In written testimony, she said she "continued to believe it more likely than not that the next move in bank rate will be up - even if uncertainty about the behavior of wage growth makes the timing of that move uncertain."
Vlieghe said officials don't think about the currency "in isolation." "We have to
it think about why the exchange rate is falling, we think it's falling because of increased uncertainty," Vlieghe said. While so far there's little evidence of an economic impact, a weaker exchange rate "might partly offset other weakness in the economy," he said. The chairman of the Treasury Committee, Andrew Tyrie, said Carney and BoE Deputy Governor for Financial Stability Jon Cunliffe will appear before lawmakers on March 8 in a session devoted to so-called 'Brexit.'
Meanwhile, Bank of England Governor Mark Carney said on Tuesday the central bank was not making judgments about the outcome of Britain's referendum on EU membership, but noted moves in sterling since the date of the vote was set.
"We're treating this vote exactly how we treat any other political event, which is not to make a judgment on the outcome and assume the status quo continues," Carney told lawmakers. "I will note though that there have been moves in sterling since it's become ... clear (about) the timing of the referendum."
He said hedging from investors against future falls in sterling around the referendum date on June 23 had spiked to levels seen around the Scottish independence referendum, adding the hedging was focused on the sterling-dollar rate.