Brexit-Driven Pound Drop Tests How ‘Indifferent’ Carney Can BeBy and
U.K. currency has weakened further toward parity with the euro
Trade-weighted rate close to level when Carney last commented
The pound’s latest Brexit-fueled decline may be getting serious enough to command Mark Carney’s attention once again.
Sterling’s weakening to the lowest since October 2016 in trade-weighted terms has brought the currency near the level that prompted the Bank of England governor to point out at the time that he and his colleagues weren’t “indifferent” to the exchange rate. That suggests any remarks from policy makers will now be scrutinized all the more for any reference to their thinking on its impact.
While most BOE officials have indicated they are willing to look through the initial inflationary impact of the pound’s depreciation since the EU referendum, another sustained decline may test their tolerance. Against the euro, the pound is near the weakest since 2009.
Even before the latest leg lower, the BOE’s own forecasts showed inflation peaking at about 1 percentage point above policy makers’ 2 percent target later this year -- leaving at least two officials voting for a rate-hike for the previous two meetings.
“There is precedent for gubernatorial observations on the exchange rate not too far from current levels,” said Sam Hill, an economist at RBC Capital Markets in London. “It would be surprising if the Monetary Policy Committee didn’t mention the inflationary implications of this if current levels prevailed by the time of the mid-September meeting.”
The BOE’s next scheduled decision falls on Sept. 14. Policy maker Michael Saunders, one of those who have voted for higher rates, has the chance to weigh in on sterling on Thursday in a speech in Cardiff, Wales. Those will be the first remarks from a voter on the MPC since the Aug. 3 Inflation Report, when Carney said the effects of the currency depreciation will be felt for the next three years.
Sterling’s move may tempt the BOE to consider the example of their counterparts in Frankfurt, who are also grappling with a currency problem -- albeit of the opposite nature. European Central Bank officials broke their silence on the euro’s advance in minutes of their July meeting, in which they expressed concern that the currency may overshoot.
“Should sterling’s depreciation continue this might call the Bank of England into action,” Thu Lan Nguyen, an analyst at Commerzbank AG, wrote in a note on Wednesday. “The central bank will not want to risk that the so far moderate depreciation trend gathers momentum.”
The pound tumbled suddenly last year in the wake of the nation’s Brexit vote, and it has now started sliding again as economic data turns sour and negotiations with the European Union resume with few obvious signs of progress. It’s fallen more than 2 percent against the dollar since Aug. 3, when Carney last spoke.
Trade-weighted sterling is now less than 1 index point away from where it was in October, when Carney noted a “substantial move” in the currency. “We’re not a targeter of the exchange rate but we’re not indifferent to the level of the exchange rate,” he said then.
Peter Kinsella, London-based senior foreign exchange and rates strategist at Commonwealth Bank of Australia, said the BOE has the tools to counter the pound’s drop if needed, though he noted that most policy makers other than Saunders have been “remarkably sanguine.”
“If they were really concerned about it they would simply raise rates,” he said.
— With assistance by Anooja Debnath