Sterling falls on rate confusion

STERLING tumbled yesterday as the Bank of England was accused of acting like ‘an unreliable boyfriend’ by blowing hot and cold on the outlook for interest rates.

The pound dropped back below $1.70 to a low of $1.6967 after governor Mark Carney appeared to play down the prospect of an interest rate rise before the end of the year.

The Canadian said the central bank is ‘balancing’ the strongest growth in the G7 and record job creation with weak wage growth and low inflation.

He told MPs on the Treasury Select Committee the meagre pay rises seen by many workers suggest there is ‘ additional spare capacity in the labour market that can be absorbed’ before the Bank raises rates.

The unexpectedly ‘dovish’ comments came less than two weeks after Carney said the first rate hike since 2007 ‘could happen sooner than markets currently expect’.

The earlier more ‘hawkish’ warning, in his Mansion House speech on June 12, was seen as a clear signal that a rate rise this year was on t he cards and sent sterling soaring.

Eimear Daly, an analyst at currency exchange specialists Monex Europe, said the latest comments ‘left money markets reeling from yet another whipsaw in policy outlook’.

‘After suggesting that rate hikes may happen sooner than expected in his Mansion House speech, Carney shocked the market with a far more dovish performance,’ she said.

Alastair McCaig at IG said: ‘The post-Mansion House move is still being unwound, and more than a few over-eager sterling bulls will be licking their wounds.’

A senior MP on the committee accused central bank officials of sending mixed signals over when rates will rise having been frozen at 0.5pc since March 2009.

Labour’s Pat McFadden questioned whether the ‘forward guidance’ provided by the Bank since Carney took over as governor last July had provided ‘ clarity’ for homeowners and businesses.

‘It strikes me the Bank is behav- ing a bit like an unreliable boyfriend end – one day hot, one day cold – and the people on the other side of the message are left not really knowing where they stand,’ he said.

But Carney, who celebrates a year in charge next Tuesday, insisted the Bank had ‘no regrets’ about forward guidance and that it had given businesses confidence to invest.

‘Interest rates are going to start to normalise at some point,’ he said. ‘We can’t tell you today exactly when that is going to be. It will be determined by the evolution of the economy.’

He added: ‘But the first interest rate increase is not the most impor- tant tatant thing. It is where the path of interest rates are set over the medium term.

‘The increase in rates is likely to be limited and the process is likely to be gradual in order to ensure that what has now been a successful recovery is turned into a durable and balanced expansion.’

Carney unveiled the first phase of forward guidance last August when he said the Bank would not even consider raising rates until unemployment fell to 7pc or lower – something he did not expect before 2016.

But a far faster fall in unemployment – down from 7.8pc to 6.6pc in the last 12 months – forced the Bank to change tack and introduce more ‘fuzzy’ guidance based on the wider economic picture.

The governor has regularly sought to dampen the prospect of an early rate rise – but appeared to change tack at the Mansion House this month.

Christopher Vecchio, a currency analyst at DailyFX, said yesterday’s comments by Carney ‘were nothing short of an effort to redact some of his hawkish tone’.

Tory MP Andrew Tyrie, chairman of the committee, noted that Carney has given ‘quite a lot of guidance’ since joining the Bank last summer with ‘not all of it seeming to point in the same direction’.