The Bank of England (BoE) is in a bit of a quandary.
Governor Mark Carney doesn’t really want to reverse the post-Brexit interest rate cut to 0.25%, because he’s not keen to admit that he panicked. But inflation – as we pointed out this morning –- has just hit 2.9%, and unless Carney is very lucky, it won’t be long before he has to write a note to chancellor Philip Hammond, explaining why he’s not making any effort to contain it.
So he needs to make the right noises, even if he doesn’t make the right moves. And at the BoE rate-setting meeting today, that’s what he did.
The Monetary Policy Committee voted by seven votes to two to keep the bank rate at 0.25%. Normally that would have sent the pound even lower (sterling bulls had been hoping for a 6-3 or even a 5-4 vote). They kept the current round of money printing too.
However, the “dovish” vote was accompanied by a very “hawkish” statement. For a start, the Bank noted that the economy was looking stronger than it had expected. But more importantly, the Bank warned that everyone on the MPC reckoned that – assuming the economy keeps going the way it is now – “then monetary policy could need to be tightened by a somewhat greater extent… than current market expectations.”
On top of that, the majority of MPC members believed “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.
That was enough to put a rocket under the pound. It surged higher against both the US dollar and the euro. Chris Giles at the Financial Times reckons the Bank is now looking to raise rates in November, as does Paul Hollingsworth at Capital Economics.
It’s impressive that the market still laps up this “forward guidance” stuff from Carney, given that he’s been wrong – or bluffing – about it on almost every other occasion.
At the same time, it’s hard to see how there’s any real justification for rates being left at current levels at all – never mind hiking faster than the market expects, there was plenty of reason to hike at this particular meeting. So maybe markets think he’s running out of excuses.
But in any case, the pound – which recently has seen a barrage of pundits calling for “parity” with the euro – has been primed for a comeback after its recent kicking.
Sometimes all the market needs is an excuse, and Carney gave them that excuse.