Pound jumps as Mark Carney says rate hike debate is building - as it happened

Graeme Wearden and Angela Monaghan

from on 2017-06-28 17:01 (#2V4HK)

The pound rose above $1.29 after the Bank of England governor said some removal of monetary stimulus could become necessary

Pound jumps above $1.29 on Carney comments
BoE governor says rates could rise if wages and growth pick up
Biggest one-day jump since April
Governor surprises markets with rate rise hint
Why Carney's comments matter
Analysts: the picture is getting muddy

6.01pm BST

PS: Here's economics editor Larry Elliott's take:

5.59pm BST

The pound is sticking firmly to its gains, up 1.2 cents or 1% at $1.294, after Mark Carney hinted that he might support an interest rate rise.

Governor Carney's hint that the Bank could withdraw some of its stimulus package if UK wages pick up, and business investment strengthens, is the talk of the City tonight.

Mark Carney, everyone's favourite dovish BoE governor, suddenly declared that the bank might need to raise rates. As a result, the pound surged above $1.29 for the first time since its election night drubbing, and this prompted the FTSE 100 to drop back to the lows of the day.

5.19pm BST

The jump in sterling has hit the share prices of multinational firms on the London stock market.

Fashion chain Burberry led the FTSE 100 fallers at the close of trading, shedding 3.4%, followed by pharmaceuticals firm Shire, which lose 2.5%.

Mario Draghi's speech yesterday, and the 'correction' which followed from ECB officials today, received the most attention, but it was arguably the BoE Chief Economist Andy Haldane's speech the week before - which touched on many of the same themes and effectively reached the same conclusion - that is a better guide to how central bank thinking continues to evolve.

The BoE remains puzzled as to why wage growth had consistently disappointed expectations despite robustness in employment growth (even though there are a number of plausible contributing factors in play). However, and this is perhaps the key take away, the BoE does not consider a change in the relationship between unemployment and wage growth (a flattening of the Phillips curve) the same thing as a breakdown of this relationship altogether. Indeed, if/when that relationship reasserts itself, the snap-back in wage growth could lead an overshoot of the inflation.

5.01pm BST

The markets have got carried away with Mark Carney's speech, argues Ranko Berich, head of market analysis at Monex Europe.

He reckons that Carney was describing the challenge facing the MPC, rather than hinting at a policy shift.

"We already know there is robust debate within the MPC on the merits of ultra-low rates, and today's speech confirms that Carney himself is not ideologically attached to either side of the argument, hawkish or otherwise.

As Carney said, once again in very plain terms, the MPC is looking to balance the current inflation overshoot against the cost of containing it through tighter monetary policy. The amount of spare capacity in the economy - a difficult thing to measure even for the BoE - is crucial for this decision, as is the outlook for how quickly growth will erode this slack.

4.41pm BST

Thanks to Mark Carney's comments, the pound has now racked up six days of gains against the US dollar.

Today's rally is the strongest move since Theresa May called the general election two months ago.

Carney makes his Mark.
Sterling rises vs dollar for 6th day in a row, its best run since March last year. pic.twitter.com/lmZVnm1ZHQ

Sterling +1% today on a trade-weighted basis, its biggest rise since April 18 ... the day Theresa May called the UK election.

4.36pm BST

Howard Archer, chief economic advisor to the EY ITEM Club, reckons that Mark Carney isn't actually in a rush to raise interest rates.

He suspects that the Bank of England wants to wait until we have a clearer picture of how Brexit will play out.

"At first glance, the latest remarks from the Bank of England Governor come across as less dovish than his Mansion House speech which gave the impression that he is in no hurry to raise interest rates. The markets have also interpreted the Governor's latest remarks as less dovish with sterling immediately spiking up following the speech.

"The Governor indicated that the inflation overshoot can only be tolerated by the Bank of England for so long. He indicated that some removal of monetary expansion is likely to become necessary if spare capacity continues to be eroded.

3.55pm BST

Mark Carney's comments are the clearest signal yet that the Bank of England is "minded to tighten" monetary policy, says Neil Wilson of ETX Capital.

But they come just hours after deputy governor Jon Cunliffe argued that there was no rush to unwind last autumn's rate cut, to just 0.25%.

There does appear to be a decided tilt towards a tightening bias, should economic conditions improve. It's a case of justifying why they shouldn't tighten rather than why they should, which appears to be a material shift from first few months of the year.

But the picture is now pretty muddy. Only last week Mr Carney said 'now is not the time' to tighten. Deputy governor John Cunliffe said only today that there is no rush to raise rates. So we are left guessing - the MPC does not seem to know where it's at and the debate is taking place in public. This ought to play out in more vote splits over the summer before a move to 'correct' its policy mis-step perhaps by the autumn, assuming economic growth and wage growth holds."

3.37pm BST

Here's more reaction, from Philip Shaw of Investec...

BoE's Carney reminds markets MPC actively debating raising rates, though he himself prefers to wait. Lights blue touch paper under sterling" pic.twitter.com/cxEgvTNmYl

It's happening people! Central Banks are heading for the exit! #BoE UK 10-year bond #yield spikes after #Carney comments. pic.twitter.com/O8pqXhQPoJ

3.29pm BST

This chart shows how the pound bounced as Carney's comments hit the wires.

#Cable soars as #Carney suggests #BankofEngland may need to start removing stimulus joining a hawkish shift among #MPC members #GBP #forex pic.twitter.com/IpCMSwrXQ8

3.23pm BST

The FT's Chris Giles agrees that Mark Carney's comments are significant.

He writes:

Mark Carney sought to clarify his position on interest rates on Wednesday, setting out his view that he would vote to tighten monetary policy if business investment begins to rise offsetting weaker consumption.

The Bank of England governor has come under pressure to say when he would vote for an increase, having previously said it was "not yet the time" for higher rates and after the close June 5 to 3 vote to keep rates on hold.

Breaking news: Mark Carney just said he would consider voting for a rise in UK interest rates https://t.co/MfjR67PuIA pic.twitter.com/lnK7R5xA0N

3.18pm BST

Connor Campbell, analyst at Spreadex, says Carney's comments prompted a "serious shift" in currency markets but traders failed to focus on the detail of what he said...

A caveat-laden statement from Mark Carney - speaking at the ECB Forum in Portugal - caused a super-surge from sterling.

Investors were uninterested in the nuances of what Carney was actually saying, focusing on the fact that the BoE chief said 'some removal of monetary stimulus is likely to become necessary' but ignoring that the central banker made it clear A LOT of things, like UK wage growth and business investment (not to mention Brexit), need to move in the right direction for that to happen.

3.17pm BST

Here's some innovative reaction to Mark Carney's unexpected hint that the Bank of England could raise interest rates in the coming months....

Carney says some removal of BoE stimulus may be necessary.

Stars (read Central Banks) are aligned, synchronized tapering around the corner? pic.twitter.com/259E50A7Em

2.44pm BST

Carney says that globally, there are signs of a pickup in investment, which should in turn support productivity growth, stronger wages and higher welfare for all.

But in the UK, not so much:

Globally, there are signs that such a rotation may be beginning. Although some UK-specific uncertainties might limit the UK's participation in that pickup, the Bank of England will make its contribution by pursuing determined policies within well-established frameworks in order to maintain monetary and financial stability.

The main issues facing UK companies are uncertainties - about how consumers will adjust to a period of weaker real income growth; about market access post-Brexit; about the potential risks in the transition to new arrangements with the EU and the rest of the world.

Monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU. But it can influence how this hit to incomes is distributed between job losses and price rises. And it can support households and businesses as they adjust to such profound change.

That has stalled diffusion of productivity gains through the economy. This shortfall in investment could reflect deeper causes such as inadequate competition, barriers to investment in knowledge-based capital and sub-optimal managerial practices.

2.41pm BST

Bank of England governor Mark Carney is appearing on a panel in Sintra, Portugal, at the European Central Bank's annual forum.

The pound jumped more than half a cent against the dollar, to $1.2915, after the Bank published his remarks:

When the MPC last met earlier this month, my view was that given the mixed signals on consumer spending and business investment, it was too early to judge with confidence how large and persistent the slowdown in growth would prove. Moreover, with domestic inflationary pressures, particularly wages and unit labour costs, still subdued, it was appropriate to leave the policy stance unchanged at that time.

Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.

1.48pm BST

Ha! The European Central Bank have been quietly briefing that investors got the wrong end of the stick about Mario Draghi's speech yesterday.

It's an attempt to calm speculation that the ECB might tighten monetary policy soon.

European Central Bank President Mario Draghi intended to signal tolerance for a period of weaker inflation, not an imminent policy tightening, when his comments sent the euro higher this week, sources familiar with Draghi's thinking said.

The ECB declined to comment.

Euro dips as the ECB reportedly sees the market as misjudging Draghi's speech https://t.co/FmcPPzqKeZ pic.twitter.com/u4IpDC4kKx

Those who stopped reading #Draghi after the "reflationary" line are being taught a lesson: every word counts in central bank communication.

1.29pm BST

Time for a quick recap

The split at the Bank of England over when to start raising interest rates has deepened, after deputy governor Sir Jon Cunliffe declared his hand. Cunliffe is firmly in the 'not yet' camp, putting him alongside boss Mark Carney, but in opposition to at least two other policymakers.

The Bank of England is clearly very divided, with deputy governor Cunliffe this morning sending rather mixed signals, ostensibly backing Carney by saying this was not the time to raise interest rates, but also noting "(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" - 'a bit of time' being the key observation.

Still getting lots of questions re Draghi's speech in Sintra. Hawkish market reaction largely unjustified imo. 1/nhttps://t.co/guYqjfEdCW

1.25pm BST

Meanwhile, in what amounts to the first public sign that light is finally at the end of the seemingly never-ending Greek crisis tunnel, creditors have announced that the country could tap international capital markets by the end of the year.

"We are half-way. We have a good framework for (non-performing loan) management. Now its time for NPLs [non-performing loans] to be reduced. Greece has created an independent tax authority. Now it's time to collect taxes " A privatisation and asset fund has been set up.

Now it's time to privatize and generate value."

12.52pm BST

Ouch! Over in a sweltering Athens it's not only the temperature that is rising.

"The images are disheartening. The tons of rubbish now on the roads conjure a third world country, definitely not a European Union state. Tourists, who have chosen Greece as their holiday destination, walk amid mountains of rubbish while the combination of the heat wave and rubbish is a direct threat to public health.

The economic damage for thousands of professional restaurateurs and tourist enterprises is huge."

Last Saturday I had the 1st date of the whole year with my husband amid the sultry summer evening breeze & stinking garbage #romance https://t.co/fpRPhX8TdP

12.08pm BST

Here's some speedy reaction to Tesco's job cuts plans, from Hannah Maundrell, Editor in Chief of money.co.uk :

"It's sad but not surprising that Tesco are making job cuts at its head office. Last week Tesco said they needed to remain "sustainable and cost effective" and this is evidently their way of streamlining the business.

"It's undoubtedly distressing news for employees of Tesco and their families. Now is the time to check what redundancy rights you have and dig out any income or mortgage protection policies you hold just in case.

Tesco to cut 1,200 head office jobs https://t.co/XgPvl9aEVK

12.01pm BST

Another newsflash: Tesco is reportedly axing 1,200 jobs at its head office.

That's a big blow to the supermarket chain's workforce, as bosses press on with efforts to cut costs.

PA reporting Tesco is axing 1,200 head office jobs. After the 1,100 call centre jobs hit last week. Just as things were looking up for them

11.56am BST

Newsflash: At long last, Britain's troubled Co-operative Bank has finally agreed a capital raising plan.

After months of negotiations, Co-Op Bank will receive 700m of fresh capital, and the Co-operative Group's stake the company will fall to just 1%.

A rescue deal for the Co-operative Bank has been clinched under which hedge funds and other investors will pump 700m into the loss-making operation.

The capital injection by means that the bank, which has 4m customers, will continue as a standalone entity after it abandoned efforts to find a buyer.

11.49am BST

Deutsche Bank's foreign exchange strategist have been forced into a screeching u-turn this morning.

They have abandoned their forecast that the euro would end the year close to parity with the US dollar, at just $1.03. They now expect it to have strengthened to $1.16 by the end of 2017.

We are completely revising our euro outlook for the rest of the year. The speech is not the fundamental driver behind the change in view, but it aptly marks the culmination of a number of developments that have caused us to change our forecasts.

A turning point? The biggest euro bear throws in the towel. Deutsche Bank sees $1.16 or higher by year end. That forecast was once $0.85.

Deutsche Bank's "euroglut" theory looks shot to pieces. In 2015 the bank forecast euro at $0.85 by end-2017. They now see $1.16 or higher.

10.52am BST

Sir Jon Cunliffe's reluctance to vote for an early interest rate rise is keeping the pound at its highest level against the US dollar since the general election.

Sterling jumped over $1.283 this morning, it highest point since the shock exit polls showed Britain had voted for a hung parliament.

The FTSE has been moving lower once more this morning, with a dovish comment from BoE deputy governor Jon Cunliffe helping recover much of the initial selling at the open

10.34am BST

The news that UK house prices rose by 1.1% this month (but not in London!) has caused plenty of chatter in the City.

Caroline Simmons, Deputy Head of the UK Investment Office at UBS Wealth Management, predicts that prices will only rise modestly over the next year.

"Whilst house price growth bounced back in June the figures still point to a slowing picture overall with annual house price growth now at just 3%. Going forward, recent political uncertainty from Theresa May's minority government and Brexit negotiations is likely to weigh on consumer confidence, denting UK house sales in the near term. There was a notable decline in new buyer enquiries following the General Election, which we expect to persist over the short term.

"Over the medium-term the picture looks slightly rosier. Structural demand remains supportive given household formation rates and credit conditions remain supportive for house prices. The banks' increased capital strength and ability to lend, alongside persistently low interest rates aiding home owners' ability to service mortgages, should continue to support house price growth.

10.01am BST

In other news, Britain's investment industry has been ordered to clean up its game and bring in radical reforms to help savers.

The City regulator, the FCA, is demanding that fund managers overhaul their charging structures and improve governance standards, to restore confidence in the sector and give customers a better deal.

To improve competition, the regulator said companies should charge a single "all-in fee", and make costs and charges more consistent and transparent for investors.

Other measures included a requirement for fund managers to appoint a minimum of two independent directors to their boards.

"I have stated several times that I am in favour of all-in fees including all costs as the industry has an obligation to deliver what the customer wants. Incorporating dealing charges for equity funds should be straightforward particularly for those managers, like ourselves, who have low portfolio turnover.

It is more challenging to calculate all-in-fees for bond funds, but I'm encouraged the industry is already looking at ways of doing this. We need to embrace the concept and commit to finding a solution for the best interests of clients.

"the FCA has hit the nuclear button" https://t.co/JzlBPgoX4N

BREAKING: UK Fund Industry reacts to FCA Asset Management Report pic.twitter.com/0u0nFvbshi

9.38am BST

The Bank of England's next interest rate decision is scheduled for August 3rd.

This will be an exciting vote, but I don't think there's enough support for an interest rate hike among the Monetary Policy Committee.

8.56am BST

Sir Jon Cunliffe has "drawn the battle lines" for August's monetary policy committee meeting by arguing against an early interest rate rise, says Bloomberg's Lucy Meakin.

Here's a flavour of her piece:

While some members of the BOE's rate-setting committee have argued that consumer-price inflation of 2.9 percent means an increase in bank rate is required imminently, Cunliffe said that has been driven by the pound's depreciation since the Brexit referendum and that wage pressures have remained low.

Inflation above the 2 percent target is "not a comfortable place," Cunliffe said in an interview on BBC radio. However, "we do have to look at what's happening with domestic inflation pressures and on the data we have at the moment, that gives us a bit of time to see how this evolves."

#BOE's Cunliffe says domestic price pressures buy time on rates https://t.co/OgPhIGSGEc via @lucy_meakin pic.twitter.com/L5VTmX9QZM

8.33am BST

London house price are now rising at the slowest rate since 2012, says Nationwide.

This chart shows how house prices in the UK capital have come off the boil, having outpaced the rest of the country for several years.

London house prices barely rising, weakest annual growth since 2012 - Nationwide pic.twitter.com/yUQ4TMpTWD

"First came Britain's electoral map, then its property map. June has seen them both redrawn.

"For London's house prices to be growing at the second slowest rate in the country would have been unthinkable for much of the past decade.

8.28am BST

Jeremy Leaf, north London estate agent, agrees that the rebound in UK house prices in June is "a little surprising".

He says that current low interest rates helped to push prices up by 1.1% last month, as did is a lack of supply:

'However, looking forward the shortage of supply and lack of housebuilding are certainly two of the factors supporting the market.

These will need to improve if we are going to see more sustainable growth in housing transactions.

Nationwide shows stronger house price growth in June after weak spring
My current estimate for the change in house prices over 2017 is 1.9% pic.twitter.com/fyywsfrrqK

Odd-looking jump in UK house prices, with stock levels low; but other signals suggesting moderation (Nationwide) pic.twitter.com/gcyM26FQUp

A gentle slide in prices could continue but it's got less to do with Brexit and more to do with four factors that can be the Four Horsemen of the Apocalypse for markets - inflation, consumer credit, wage growth and mortgage activity - all of which have been dragging their heels recently.

"In May, mortgage approvals hit an eight-month low, wage growth slumped, inflation rose unexpectedly to 2.9%, a near four-year high, and consumer credit also fell dramatically.

8.24am BST

Guardian Business has launched a daily email.

Besides the key news headlines that you'd expect, there's an at-a-glance agenda of the day's main events, insightful opinion pieces and a quality feature to sink your teeth into each day.

8.09am BST

Now here's a surprise.... UK house prices have rebounded quite strongly this month, despite a slowdown in London.

Prices rose by 1.1% in June, according to the latest figures from Nationwide, reversing three months of falls. That means the average house costs 3.1% more than a year ago, at 211,301.

"The annual rate of house price growth, which gives a better sense of the underlying trend, continues to point to modest price gains. Annual house price growth edged up to 3.1% from 2.1% in May.

In effect, after two sluggish months, annual price growth has returned to the 3-6% range that had been prevailing since early 2015.

8.00am BST

Jon Cunliffe also admitted that the recent surge in inflation, to 2.9%, means the Bank of England isn't in a "comfortable place" right now.

Bank of England Cunliffe says the MPC is not "in a comfortable place" as civil war rages on the MPC with a clear split in opinions forming. pic.twitter.com/O5IB7UO1WL

7.56am BST

The split at the Bank of England over when to raise interest rates has widened further this morning, after deputy governor Sir Jon Cunliffe waded in.

"[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.

(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."

7.30am BST

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Central bankers are commanding our attention again today. Last night, Federal Reserve chair Janet Yellen gave a rare hostage to fortune by predicting that we'll probably live out our days without seeing a repeat of the 2008 crisis.

"Would I say there will never, ever be another financial crisis?

"You know probably that would be going too far but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be."

Fed's Yellen expects no new financial crisis in 'our lifetimes' https://t.co/Jj1uL7sNVM pic.twitter.com/IRKVn2IedK

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