Bank of England governor Mark Carney caused the pound to spike yesterday after he said a rate hike may be needed if businesses look through Brexit uncertainties and increase investment.
“Some removal of monetary stimulus is likely to become necessary if the trade-off facing the Monetary Policy Committee continues to lessen and the policy decision accordingly becomes more conventional,” Carney told fellow central bankers at a forum in Sintra, Portugal.
Sterling jumped to $1.297, having printed $1.28 earlier in the day. In New York late last night it was trading at $1.293.
Carney added: “The extent to which the trade-off moves in that direction will depend on the extent to which weaker consumption growth is offset by other components of demand including business investment, whether wages and unit labour costs begin to firm, and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit negotiations.”
The MPC has publicly split over whether to raise interest rates, with three of its eight members voting this month to raise bank rate by 0.25 percentage points to 0.5 per cent, undoing the emergency stimulus introduced after last year’s referendum.
The Bank’s chief economist Andy Haldane – who did not vote for a change – added his weight to the hawks on the committee last week, suggesting a rate hike is nearer than previously thought.
Carney has marked himself out as a determined dove leading the committee, although his latest speech acknowledges the tensions within the MPC.
Bank of England deputy governor Jon Cunliffe also weighed in on the debate.
“[Consumer spending] is slowing as households’ real incomes are squeezed by higher inflation. We expect some of that slowing to be offset by growth in business investment, growth in exports. And I want to see how that plays out,” Cunliffe told the BBC yesterday, when asked if now is the right time to tighten the Bank’s stance.
“[We] do have to look at what’s happening to domestic inflation pressure and I think that, on the data we have at the moment, gives us a bit of time to see how this evolves.”
Despite the pound’s rise yesterday, many City economists expect rates to stay at their record low. “Carney still seems in no immediate hurry to raise interest rates,” commented Howard Archer of the EY Item Club, which believes rates will remain unchanged throughout 2017.