Pound retreats on dovish Carney speech

By Michele Maatouk

Date: Thursday 09 Jan 2020

Pound retreats on dovish Carney speech

(Sharecast News) - Sterling lost ground on Thursday after outgoing Bank of England governor Mark Carney struck a dovish tone in a speech at an event on inflation targeting, suggesting that the central bank could cut interest rates soon.
At 1010 GMT, the pound was down 0.5% against the dollar at 1.3030 - its lowest level since 27 December - and 0.4% lower versus the euro at 1.1742 after Carney cautioned that the rebound projected in the BoE's forecasts for this year was not assured and said the economy has been ""sluggish".

Carney said the pace of UK growth "has slowed below potential" due to the weaker external backdrop and a persistent drag from entrenched Brexit uncertainties.

"Unusually during an expansion, business investment has contracted in four out of the past seven quarters and is currently estimated to be just 1½% higher than at the time of the referendum, with cumulative growth more than 20 percentage points less than forecast in the MPC's May 2016 projections," he said.

"Household spending growth has remained more resilient, supported by strength in employment and pay, but over the past year it too has slowed as uncertainty about the overall economic outlook has become more entrenched.

"In the MPC's most recent projections, we expected these negative trends to reverse. Overall, UK GDP growth was projected to pick up from current below-potential rates, supported by the reduction of Brexit-related uncertainties, an easing of fiscal policy and a modest recovery in global growth. This rebound is not, of course, assured."

He pointed to growing slack in the economy and the fact that inflation is below target.

"Much hinges on the speed with which domestic confidence returns. As is entirely appropriate, there is a debate at the MPC over the relative merits of near-term stimulus to reinforce the expected recovery in UK growth and inflation."

Carney said there was room "to at least double" the August 2016 package of £60bn asset purchases.

David Cheetham, chief market analyst at XTB, said: "While this shouldn't come as a huge surprise given that there has been a couple of MPC dissenters calling for lower rates at the past two policy meetings, it is the strongest hint yet for a rate cut in the not too distant future."

Andy Scott, associate director at JCRA, said: "Economic data for January and February will be key in determining whether any other members of the Bank's MPC join the two who voted to cut rates at the previous two meetings. Unless the economy tips into recession, it seems unlikely that the Bank would opt for a series of rate cuts and/or quantitative easing that would potentially drive sterling movement lower.

"Instead, we expect Brexit - specifically the trade negotiations - to continue to be the primary influence on the currency's movement in 2020, which suggests we could be in for another volatile year!"

Berenberg economist Kallum Pickering said: "Our base case is for the BoE to remain on hold in H1 2020 as economic momentum rebounds. We then expect the BoE to hike the bank rate by 25 basis points in Q3 2020. Carney's comments today highlight the risks to this call.

"We thus cannot rule out a surprise rate cut or the restarting of asset purchases in the very near term. While Carney also noted that the BoE forecasts these 'negative trends to reverse', we believe it would be unnecessary for the BoE to seek to 'reinforce the expected recovery'."

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