Kristian Rouz — Bank of England (BOE) Governor Mark Carney has sent a dovish policy signal to the markets by saying a rate hike in May might not necessarily take place, as there are ‘other meetings' of the Monetary Policy Committee (MPC) during the year. His comments sent the pound sterling's FX rate lower, as investors were pricing in the long-anticipated policy-tightening move.
Carney's remarks came about as quite unexpected, as the UK's inflation is far above the BOE's 2-percent target, while the overall economic growth has been solid despite investor concerns over the tumultuous Brexit talks. UK employment is near its multi-year highest, while gains in salaries and wages are only percentage points behind the broader inflation measure.
"The biggest set of economic decisions over the course of the next few years are going to be taken in the Brexit negotiations and whatever deal we end up with. And then we will adjust to the impact of those decisions in order to keep the economy on a stable path," Carney said in a BBC interview, adding that a few interest rate hikes are planned over the next several years.
Carney said MPC actions this year will be data-dependent, adding the Committee will make its decision on base borrowing costs in May ‘conscious that there are other meetings' to implement the move later this year. This was enough to impair investor confidence, as the chances of a May rate hike dropped below 50 percent in investor consensus expectations.
"The probability of a May move had already slipped below 70% after this week's soft wage and price data, but watch hawk Saunders' comments today for risks the other way," Adam Cole of RBC Capital Markets said. "Some overnight stories also suggest new problems in the race to find a compromise on the Irish border and the UK's EU exit terms."
The International Monetary Fund has warned that the UK might become the slowest-growing among the advanced economies this year, unless it's able to strike a mutually-beneficial Brexit deal with the EU.
Carney stressed that the MPC will be assessing the state of the economy ‘in the round' when making its decision on rates.
The BOE Governor also acknowledged the risks and uncertainty stemming from the Brexit process as influencing central bank policymaking process. Carney said future developments in the Brexit talks and a resulting separation deal will require monetary policy adjustments aimed at "keep(ing) the economy at a stable path."
However, some observers point out that the BOE might still go ahead with the May hike, and if not, more than one rate hike is still possible this year due to further projected economic improvements.
"‘Keep calm and carry on' is still our message when it comes to the pound's medium-term bullish trajectory," Viraj Patel of ING said. "While the pound has been feeling the heat this week after a string of data misses and cautious BOE policy comments, we're not inclined to call time on the rally just yet; put differently, it may be getting hot in here, but there's no need to take your positions off just yet."
Meanwhile, investor demand for UK government bonds — or gilts — has increased this week, not least due to the moderating growth expectations. This has suppressed the yield somewhat, supporting the BOE's possible decision to keep rates unchanged for at least two more months.