Carney defends BoE interest rate cut, hints at further stimulus

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8 September 2016

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling fell across the board on Wednesday after Governor of the Bank of England Mark Carney launched a staunch defence of the central bank’s decision to slash interest rates to a fresh record low last month.

D
uring a grilling by MPs at yesterday’s inflation report hearings in London, Carney claimed the central bank was ‘validated’ in its decision to slash rates, despite some criticism from pro-Brexiters that the bank had acted too early.

Governor Carney also left the door open to fresh stimulus measures in the future by reiterating that policymakers stand ready to take whatever action is needed in order to support the UK economy. We think that an expansion in the bank’s quantitative easing programme, or even a further interest rate cut to zero, could be on the way should economic data in the next few months take another turn for the worse.

Sterling fell against both the US Dollar and the Euro on the back of Carney’s comments, losing steam from its earlier rally, which came after the release of impressive business activity PMIs.

Investors now switch their attention firmly to the European Central Bank and today’s monetary policy announcement following the Governing Council’s two day meeting.

We think there has been little evidence to suggest we’ll see any further rate cuts or quantitative easing expansion from the ECB. We do, however, expect at least a six month extension in the asset purchase timeframe, beyond the existing March 2017 limit, plus clear rhetoric that an expansion in the QE programme could be on the way in December. Any less from the ECB should provide decent support for the single currency today.

Major currencies in detail:

GBP

The Pound fell 0.6% against the Dollar yesterday following Carney’s comments that more economic stimulus could be on the way.

Data out of the UK yesterday morning continued to suggest that the domestic economy weathered the Brexit uncertainty relatively well in July. Industrial production rose, following a flat month of June, expanding by a larger-than-expected 2.1% on a year previous. Manufacturing output also increased, albeit slightly less than forecast, growing 0.8% year-on-year.

Yesterday’s economic growth estimate from the National Institute of Economic and Social Research also suggested that not everything was doom and gloom post-Brexit. The think tank now forecasts 0.3% growth in the three months to August.

No economic announcements in the UK today means that the monthly trade data on Friday will be the next major release in the pipeline.

EUR

Investors were in a cautious mood ahead of today’s ECB meeting, with a lack of any major announcements in the Eurozone yesterday causing the Euro to end the day just 0.1% lower versus the Dollar.

Industrial production in Germany added to the growing stream of disappointing data coming out of Europe’s largest economy of late. Output declined 1.5% in July, suffering its worst monthly performance since August 2014. Demand remains soft due to weak activity in China and the Eurozone and a general shift away from manufacturing towards services.

The European Central Bank will steal all the headlines today. The interest rate decision will be announced at 12:45 UK time, followed by Mario Draghi’s press conference at 13:30. We think any comments from Draghi regarding the likelihood of further stimulus in December will grab far more attention that the interest rate announcement itself.

USD

A late rally caused the US Dollar index to end the London session 0.2% higher on Wednesday.

US labour market data continued to point to a firming in economic conditions yesterday. The latest JOLTS job openings figure was impressive, rising to a new record high of 5.87 million in July. The number of voluntary quitters, seen as another indicator of labour market strength, also increased to 2.98 million, up almost 10% from a year previous.

Jobless claims this afternoon are expected to remain around the 260,000 level, although will likely be a non-event given all attention will be firmly on Mario Draghi’s press conference.

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