Flirting Is Fine

Britain's Unreliable Boyfriend Ghosts the Pound

But Mark Carney's heart is at least in the right place this time.
Chris Ratcliffe/Bloomberg

The pound's slow but steady gains in the past year or so have seen it recover almost all of its post-Brexit referendum losses against the dollar. But in a welcome sign that monetary policy remains data-dependent rather than driven by what might be called fear of missing out, Bank of England Governor Mark Carney may have just halted its ascent.

Party's Over?

The pound may struggle to extend its rally against the dollar

Source: Bloomberg

It's almost four years since a U.K. lawmaker accused Carney of acting like an "unreliable boyfriend" for flip-flopping on when interest rates would rise. On Thursday, the central bank chief suggested that traders who'd been betting that a rate increase next month was a done deal might want to revise their thinking.

At face value, his comments to the BBC on the outlook for borrowing costs look innocuous enough. "I am sure there will be some differences of view but it is a view we will take in early May, conscious that there are other meetings over the course of this year," he said.

But coming in the wake of data this week that showed inflation decelerating faster than economists expected, earnings growth remaining lackluster and retail sales collapsing last month, traders rightly interpreted Carney's interview as an explicit market intervention.

Definitely Maybe

Carney's comments prompted traders to cut the probability of higher rates to less than 50% at one point on Friday morning

Source: Bloomberg

Central bankers in the U.K., the euro zone and Japan must be looking jealously at what their colleagues in the U.S. have achieved. The Federal Reserve has raised its key rate six times since the end of 2015, to 1.75 percent.

If the economy takes a turn for the worse -- and the evidence is mounting that the synchronized burst the global economy has enjoyed recently may be sputtering -- the Fed is alone among major central banks in having sufficient elbow room to combat the downdraft.

The guardians of economic stability are uncomfortable with official borrowing costs at or below the zero bound. ECB policy maker Ewald Nowotny was explicit about the issue earlier this month, saying that one argument for moving "perhaps a bit faster" with policy normalization is "to have some room for maneuver if we should see some deterioration in the economic condition."

The Bank of England is acutely aware that Brexit threatens to undermine the British economy. With less than a year to go before the U.K. leaves the European Union, policy makers were clearly hoping to nudge interest rates higher so they would have scope to counteract any post-departure weakness.

With households still feeling the pinch and income growth remaining weak, Carney is right to press pause on those tightening moves. Flirting with higher rates is fine -- but only if and when the economy is sufficiently resilient to survive tighter monetary conditions. A fickle Carney beats a predetermined Carney any day.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Mark Gilbert in London at magilbert@bloomberg.net

    To contact the editor responsible for this story:
    Jennifer Ryan at jryan13@bloomberg.net

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