BoE Newbie Haskel Dents the Pound

- New MPC member endorses Bank's current path to higher interest rates

- But sends mixed messages to markets with comments regarding slack

- Pound Sterling needs an August interest rate rise to defend current levels

Image © lazyllama, Adobe Stock

The newest member of the Bank of England's Monetary Policy Committee (MPC) has appeared before lawmakers to give a flavour of how he might influence the future course of monetary policy at Threadneedle Street.

The initial takeway by markets is that Jonathan Haskel, who will replace Ian McCafferty on the MPC, will adopt a cautious approach to voting for an interest rate rise, something that has seen the British Pound come off its daily highs.

Haskel, who joins the policy-making panel in September, tells Parliament's Treasury Select Committee that "it's a close run judgement" on the interest rate forecast, adding "at this stage, I would merely say that given current conditions and current economic data, I agree with the broad direction of travel."

Crucially, Haskel says he sees more slack in the UK economy than currently factored in by the Bank of England; this is shorthand for interest rates could stay lower for longer as UK unemployment must fall yet further before substantial wage rises will start stoking inflation.

"His comments about how the Bank of England must be wary of raising interest rates too quickly are creating a drag on the Pound’s performance," says Mamish Muress, currency analyst at OFX.

Haskel replaces the "incredibly hawkish Ian McCafferty" notes Muress, who has voted for a hike in interest rates 18 times in the last four years, going against his peers on 17 of those occasions.

"The Pound faces a double whammy if the BoE leaves the Bank Rate at 0.5% on August 2. This is because the immediate GBP-negative reaction to the absence of a rate hike will be magnified by the knowledge that the MPC will have lost one of its hawks, McCafferty, by the time it votes again on rates on September 13," says Robert Howard on the Thomson Reuters currency desk.

For Sterling, an interest rate must be delivered in August or November for markets to keep the currency bid, particularly if Brexit negotiations sour.

"McCafferty leaves before the MPC votes once again in November, and looking at recent joiners such as Silvana Tenreyro, it’s incredibly unlikely that Haskel – McCafferty’s replacement – will vote for a hike against Mark Carney and co.,” adds OFX's Muress.

With regards to Brexit, the incoming MPC member says, "depending on Brexit negotiations, there might be at least a temporary lull in the economy". Neil Jones, a dealer with Mizuho Bank says this comment, "speaks volumes" and that in his opinion Haskel is "likely to vote for a hold than a hike & may well shift the voting pattern back in favour of the doves."

However, we would point out that such a stance on Brexit is entirely compatible with the official stance at the Bank of England who have consistently said they will respond to any slowdown resulting from Brexit.

And, we do see other comments that lead us to worry that the market might have over-egged any hints of caution from the Bank's newbie.

Haskel believes he is perhaps somewhat more optimistic on productivity growth than the BoE and NIESR, which to me appears to be a suggestion that wage pressures might in fact build faster than the Bank is expecting. To us this is a pro-Sterling stance. Haskel also says the opportunities for adjusting the Bank rate to control the economy would appear to be growing.

Eyes remain focussed on the August MPC meeting with money markets currently ascribing a 50/50 chance of an interest rate rise, while a rise by November is given a +70% chance. Should the odds rise, we would expect Sterling to remain relatively supported, particularly as markets have now largely flushed out their long bets on the currency.

"While political uncertainty is almost always currency negative, the Bank of England could offer support to the Pound if risk of a 2018 rate hike can be nurtured," says Jane Foley, a foreign exchange strategist with Rabobank.

At the time of writing we are seeing the Pound-to-Euro exchange rate broadly unchanged at 1.1339, which represents a nine-day low. The June lows in the exchange rate are at 1.1316.

The Pound-to-Dollar exchange rate is quoted at 1.3217 having registered a multi-month low at 1.3102 just last week.

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