Sterling jumps as Mark Carney positive on UK economy Sterling jumps as Mark Carney positive on UK economy

Sterling jumped forward this morning in the wake of the latest data from the Bank of England, as Mark Carney and his colleagues cast a distinctly positive light upon the prospects for the UK economy.

 Sterling jumps as Mark Carney positive on UK economy

Mark Carney is positive on the outlook for the UK economy

The central bank’s monetary policy committee voted by 5 to 3 to keep interest rates as they are. That surprised market participants who had taken the view that the Bank of England would look through the present high inflation rate for fear that an interest rate increase would harm the UK economy.

The balancing act Mark Carney and his colleagues are trying to strike is that putting interest rates up tends to slow down the rate of inflation, as it means borrowing costs rise, so fewer people borrow and spend.

It would serve to boost the value of sterling on international markets as higher interest rates mean the income that can be earned from UK government bonds rises, increasing demand for those products from overseas investors.

Read more: Mark Carney issues stark interest rates and inflation warning 

But the increase in borrowing costs might also be expected to slow down the level of aggregate demand, and economic growth in the short term.

So Mark Carney and his colleagues would like to only put interest rates up when economic growth looks robust, and the inflation rate is rising.

Ben Brettell, senior economist at Hargreaves Lansdown is amongst the slew of analysts surprised by the Bank of England’s tone this morning.

He said, ‘Set against a backdrop of disappointing retail sales, slowing growth, shrinking real wages and heightened political uncertainty, it was somewhat surprising that three MPC members voted for higher rates at this week’s policy meeting.

Read more: Mark Carney ‘fouled up’ on Brexit so inflation could get messy 

Economists had expected a 7-1 split, with the soon-to-depart Kristin Forbes the lone voice calling for higher rates. In fact she was joined by Ian McCafferty and Michael Saunders in believing intensifying inflationary pressures justify an immediate…increase.’

It seems the willingness of the MPC to ‘look through’ higher inflation and leave rates on hold is wearing thin, and if inflation continues to surprise we could see higher rates by the end of the summer.

The minutes (of the latest MPC meeting)  show policymakers are more optimistic than many economists about the UK’s prospects. Despite the current weakness in wage growth, they see this picking up sharply over their forecast period, and also believe lacklustre consumer spending will be offset by a pickup in other components of demand – notably exports, which are being helped by the depreciation of sterling and stronger growth elsewhere in the world. The minutes made no mention of last week’s surprise election result.’

Michael Metcalfe, global head of macro strategy at State Street Global Markets commented, ‘May’s {data} had revealed it would take little additional upside news on the prospects of activity or inflation for MPC members to consider a more immediate reduction in policy support. Since then April’s unexpectedly large rebound in retail sales and inflation has comfortably qualified as such news. What is perhaps more surprising is that the hawkish tendencies of the BoE have not been derailed by the return of political uncertainty following the election. It will take months to disentangle how the election will impact Brexit negotiations, as well as business and consumer confidence. Nonetheless, with Michael Saunders and Ian McCafferty getting behind calls for a base rate hike, it seems clear today is the BoE’s immediate concern on inflation is trumping what potential political fallout there may be on the economic outlook.’

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