BOE’s Fisher Says Pound Level Inconsistent With Trade Gap Size

Bank of England Markets Director Paul Fisher said the U.K.’s trade deficit is inconsistent with a stronger pound exchange rate.

“We are still, as a nation, running a large deficit in terms of our external trade,” Fisher said in an interview on BBC Radio Five Live today. “That’s not consistent with a stronger exchange rate. A stronger exchange rate in the long run makes us all better off. In the short run, a stronger exchange rate discourages exports.”

While BOE Governor Mark Carney said yesterday that “the recovery has finally taken hold” and the central bank raised its forecast for economic growth, Britain’s trade gap widened to the most in more than a year in the third quarter. The total deficit increased to 9.72 billion pounds ($15.6 billion) as exports fell 3.5 percent.

The pound is “a bit stronger now than it was earlier in the year” said Fisher, the former head of the bank’s foreign-exchange division. Positive economic data has helped the currency strengthen, he said.

The pound was little changed $1.6048 at 8:05 a.m. in London after climbing 1 percent yesterday, the biggest increase since Oct. 17. The U.K. currency has strengthened 3.4 percent in the the past three months, the best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes.

In a separate interview on BBC Radio Four, Fisher said that while the pace of the recovery was a welcome surprise, the Bank of England wants to stimulate the economy until all slack is used up.

Fisher Surprised

“We have been predicting and hoping for the economy to recover in this way for quite some time and then it suddenly comes through in a rush,” he said. “That switch from a very flat outlook to one where we’re growing at around, if not slightly faster than, trend is a little bit of a surprise.”

Fisher spoke the day after Carney presented new forecasts signaling that officials may consider raising interest rates sooner than they previously anticipated as the U.K. economy recovers “robustly” and inflation slows.

The jobless rate is more likely than not to reach the 7 percent threshold, when the BOE might start thinking about increasing borrowing costs from a record-low 0.5 percent, in the third quarter of 2015, the central bank said in its quarterly Inflation Report. It previously didn’t see that happening until the second quarter of 2016.

“Eventually, if we get inflation on target at 2 percent and economic growth at, say, 2 1/2, you might expect interest rates to be in the 4- to 5-percent range, that would be more normal,” Fisher told BBC Radio Five.

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