Believing Carney Cost the Pound Its Mojo

Subscribe to Bloomberg | Quint
The Daily Newsletter
News & Stock Alerts

(Bloomberg) -- The pound saw it coming, and now it's pretty much confirmed — Britain's economic growth has slowed. And that's probably killed the Bank of England's rate hiking cycle before it even got started.

Weaker than expected purchasing managers surveys published Thursday have turned out to be the last straw before the May 10 policy decision. These reports are the most forward-looking pieces of information policy makers will have, and there was an opportunity to undo the damage from the dismal first-quarter gross domestic product report.

That doesn't look like it will happen. The services number was a particular disappointment — 52.8 was well below forecasts for 53.5. Within that, signs job growth has cooled will definitely worry the Monetary Policy Committee.

And it had all been going so well for sterling. Investors had bought Bank of England Governor Mark Carney's signaling that a series of rate increases was on its way, helping the currency recover nicely — all the way back to where it was right before the referendum on European Union membership.

But then the Governor started trying to have things both ways. Once Carney flagged up the prospect of the MPC not being boxed in to hiking this month — a box it had put itself in — investor expectations for an increase sank. The chances of rates reaching 0.75 percent next week are now just 10 percent, a staggering drop from the 100 percent certainty priced in at the start of April. Even the chances for an August hike are barely above 50 percent.

The economic slowdown has surprised everyone, not least the central bank itself. 

It will still most likely be a split vote as the dissenters at the last meeting in favor of an increase, Michael Saunders and Ian McCafferty, will be unlikely to deviate from their view. Their colleagues will probably keep their finger on the pause button.

But it's a sad day for sterling. It's lost its floor. True, a large part of this is due to dollar strength. But there are few signs of relief on the domestic front. The government is in disarray over Brexit and Prime Minister Theresa May's connection to a deepening immigration scandal. Thursday's local elections are going to provide her Conservative Party the opportunity to engage in a serious exercise in damage limitation. The prospect of new lows for the pound await.

©2018 Bloomberg L.P.

Bloomberg
View Opinions From Business And Policy Experts On BloombergQuint
Subscribe to Bloomberg | Quint
The Daily Newsletter
News & Stock Alerts