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BoE’s Carney Stuck Between Growth and Inflation after Pound Fall

BoE’s Carney Stuck Between Growth and Inflation after Pound Fall

Varun Jaitly, Contributor


Talking Points:

  • Bank of England’s Mark Carney spoke at the LSE Monday on policy trade-offs
  • He noted that the BOE has to choose between higher inflation or lower growth
  • Governor Carney believes the BOE August rate cut saved both jobs and output

Check out our analysts 1Q 2017 market forecasts for the British Pound DailyFX Trading Guides page

The British Pound returned to its slide following comments from the Bank of England’s Governor Mark Carney as he spoke about risks to the economy and policy moving forward. In his speech at the London School of Economics (LSE), Carney spoke on the policy trade-off that complicates the BOE’s monetary response. A key tenet of his discussion was the use of the interest rate mechanism leading to lower foreign exchange rates, which also implies stronger inflation.

In his speech, he stated categorically that the Bank of England has a low tolerance for inflation, given that the headline interest rate is currently at 0.25 percent. The lower interest rate trade-off for Carney is between higher inflation and lower growth, something he notes as unique to the UK as the Fed and ECB have not had similar issue in recent years.

In August, the BOE chose to lower interest rates from 0.50 percent to 0.25 - as well as announce £60 billion in government and £10 billion in corporate bond purchases - following the results of the UK referendum vote. The Bank was outspoken on its reasoning of the risks of “Brexit” to the economy. In today’s speech Governor Carney stated that the choice saved jobs and output, he also reiterated that the bank can respond to risks in either direction.

Carney noted that the UK economy has seen a number of supply shocks since the great financial crisis, which also implied stronger inflation. Domestically, Carney sees households “looking through Brexit uncertainty”, which has led to solid consumer growth momentum. However, he conceded that consumption-led growth is generally slower.

Read more about how "The Pound gapped lower to start the week in large part due to anticipation that Prime Minister May will pursue a 'hard Brexit' according to Senior Currency Strategist Ilya Spivak.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.