The pound stumbled against the dollar and the euro this week as Bank of England governor Mark Carney appeared before MPs and suggested there was more spare capacity in the labour market than once thought – which implies the economy can recover more before there’s likely to be much wage inflation, or pressure to raise interest rates. This contrasted sharply with his warning of just a fortnight ago that rates could rise faster than markets expected.
One MP accused the bank of behaving “like an unreliable boyfriend. One day hot, one day cold.” Meanwhile, several British firms, including defence group Chemring and chemicals maker Croda, have warned that the strong pound, now at a five-year high against the dollar, is undermining foreign sales.
What the commentators said
Perhaps Carney’s chopping and changing represents “a new policy of quantitative teasing”, said Ruth Sunderland in the Daily Mail. While he could argue that when the data changes it makes sense to change one’s mind, “too many apparent U-turns within too short a time creates confusion”.
The City is “entirely baffled”, agreed Larry Elliott in The Guardian. Carney’s main policy initiative, forward guidance, “lies dead in the water”. Far from reducing uncertainty about future rate rises, he has returned us to the time when the Bank assumed “the future was unknowable and… the interest-rate decision had to be judged afresh each month”. So “apart from the bigger salary and the Canadian accent”, there is barely any difference between Carney and his predecessor Mervyn King when it comes to monetary policy.
Meanwhile, the Bank is probably glad that sterling has hit its recent highs, said Phillip Inman, also in The Guardian. It will keep a lid on import prices and offset inflationary pressure. But if a high exchange rate becomes entrenched, then “exporters [may] decide the pound is working against them to such an extent that they may as well give up”.
However, the fuss about the pound hitting exports is overdone, said Jeremy Warner in The Daily Telegraph. Manufacturing comprises just 10% of the economy now, and it’s mostly “niche, high-value-added, and relatively price-insensitive”. The same is true of service exports, at which we excel. This is why our exports haven’t really benefited from a weaker pound in recent years, but should also be largely unaffected by a stronger one. The level of the currency can’t be the decisive factor in the long-term performance of a country’s manufacturing sector. Look at Germany: its industry adapted perfectly well to a steadily climbing deutschmark.