Carney & Co. Remind Parliament it's the Data they Care About

Image © Simon Dawson, Bloomberg, Bank of England

Those with an interest in the British Pound will be watching the Governor of the Bank of England Mark Carney and other members of the Bank's Monetary Policy Committee (MPC) testifying before Parliament's Treasury Select Committee. 

Proceedings kicked off with the questioning of MPC member Gertjan Vlieghe at 09:15, with Carney, David Ramsden and Michael Saunders joining 40 minutes later to give testimony regarding to the decision taken by the MPC to keep interest rates unchanged in May. The attendees are also shedding light on the details of the economic forecasts contained in the Inflation Report released at the May 10 meeting.

The Governor bore the brunt of criticism from the Committee who have predictably questioned the Bank's decision to hold off raising interest rates in May; something that had been signalled to the extend that markets were ascribing a close-on 90% chance of such an outcome being borne out in the months leading up to the meeting.

Carney opted to remind the Committee the economy did not evolve in line with February forecasts, and that the MPC will wait for momentum to return before raising interest rates saying the country - i.e. businesses and consumers - will understand that a gentle path of rises are coming.

This is assessment is consistent with previous comments from Carney and is hardly bullish for Sterling which is looking for strong hints that the Bank is eyeing a rate rise by at least August, and the currency subsequently came off its daily highs.

Carney does however expect business activity to pick up over coming months, but crucially not all lost output is expected to be recovered, hence the need to delay raising interest rates.

There was something of a boost for the currency earlier on the Vlieghe testimony; the MPC member says he sees a potential benefit of the MPC publishing interest rate forecasts - this is something the US Federal Reserve does, via their dot-plot graphs. This could potentially smooth the Bank's function of guiding markets  on interest rates.

This is "probably a bad idea now (ask the Fed). Apart from that, Vligehe sounding fairly optimistic over a rate hike and so helping GBP nudge higher a bit," says Viraj Patel, an analyst with ING Bank N.V.

Vlieghe maintains the view that interest rates will continue to rise, albeit at a slow level over coming years. Interestingly, he has appeared rather sanguine in terms of the potential impact to the UK economy posed by Brexit, suggesting the tariffs that are being viewed won't require any substantial revisions to economic forecasts.

He also reiterated that his view on the UK's economic growth is similar to the committee's view - that the slowdown in the first three months of 2018 was mostly a blip and that Brexit headwinds will eventually fade and that will allow them to raise interest rates more confidently moving forward.

ING's Patel does however offer us an important reminder regarding all things Bank of England - that its data that actually matters: "remember everything the MPC say today is conditional. Focus on the incoming data to correctly assess policy outlook and place relatively less emphasis on exact Bank of England signals today."

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Pound Faces Numerous Uncertainties, but Bank of England Guidance Offers Some Support

For currency markets, any insights on the future direction of interest rates coming from the Bank of England is key owing to a rule-of-thumb that Sterling tends to rise when markets believe the likelihood of an interest rate rise occuring is increasing, and vice versa.

At present, there is a 50-50 chance being priced by markets of an interst rate rise occuring in 2018, so there is scope for this assumption to rise, data willing.

The Bank Monetary Policy Committee voted 7-2 to keep interest rates unchanged at 0.5% in their May policy meeting while the Inflation Report shows in-house economists forecasting inflation to cool faster than previously expected. These downgrades are a signal to markets the Bank won't be raising interest rates as fast as previously expected with question marks now hanging over whether rates will rise in 2018 at all.

In line with the moves, Pound Sterling sold off across the board.

Fears of what the Unreliable Boyfriend Mark Carney might say to the UK Parliament today drove the UK Pound £ below 1.14 to the Euro yesterday #TSC #BoE

— Shaun Richards (@notayesmansecon) May 22, 2018

"GBP investors still have to face numerous uncertainties," says Esther Maria Reichelt, an analyst with Commerzbank. "On the fundamental side of things there are increasing headwinds. Following the confused communication from the Bank of England in the course of its May rate decision, the FX market still considers the likelihood of an August rate hike to remain below 50%."

Reichelt adds "GBP investors are concerned that in view of the emergence of increased Brexit uncertainty this won’t change following today’s marathon speeches by BoE governor Mark Carney and three of his colleagues from the monetary policy committee, in particular as the inflation data for April tomorrow is likely to illustrate that there is no urgent need for action on the inflation side of things."

"However, until a solution emerges on the Brexit front, a BoE rate hike is the only things that could support GBP temporarily. Without it Sterling remains unattractive."

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