Mark Carney has finally given us what we wanted to hear, however it does paint a very bleak picture of the UK economy in a time when the country is in political turmoil and staring down the barrel of the unknown. IN his delayed Mansion House speech, originally planned for last Thursday after the BoE announcement, the governor of the Bank of England poured scorn on those dissenters from the 5-3 vote, and told the waiting media that now was not the time to raise rates in the UK.
The main point he mentioned was one that we spoke about on this very forum last week after the BOE vote came in, how can you vote for a rate hike with wage growth at 1.7% and inflation at 2.9%. The pictures echoes that of the US last year as the Fed raised rates only once instead of the four rates that had been previously predicted. Then wage growth was the biggest issue, and even now in the US wage growth remains relatively low.
Lets not forget what a rate hike does to borrowers, it puts debt payments up, and with household debt in the UK including mortgages up at approx £53,000 per household and at £13,000 excl mortgages, this could spell disaster for some families. Mark Carney himself predicted that inflation would be at 2.8% by the end of 2017, however we are already at 2.9% in June! Wage growth is key now in any jobs report, we know people are getting jobs and we know the unemployment rate is coming down, but that does not paint a full picture. If earnings do not go up at at least the same pace as inflation, then raising debt payments for millions of people should not be on the table. Remember consumer spending is already being hit by higher prices.
There is also the Brexit issue to look at when discussing monetary policy, and again mentioned by Governor Carney today. The issue being, not one of us has any idea what Brexit means for the UK economy. Good, bad, who knows? So we must be cautious when it comes to pushing this idea of rate and policy normality.
The pound reaction to the speech was as expected, as any dovish comment is bearish for the currency. Last weeks shock 5-3 vote pushed cable back above the 1.2800 level, but this morning as seen us head aggressively lower, with the pound now eyeing a test of the post election lows down at 1.2635. It’s hard to predict the pound going forward, but there is definitely a period of consolidation needed after a tumultuous few weeks.
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