BoE: Carney’s speech was a bit more of a mixed bag - Rabobank

After the Bank of England’s hawkish shift last week sent sterling substantially higher, Governor Carney’s speech yesterday was a bit more of a mixed bag, explains the analysis team at Rabobank.

Key Quotes

“There was definitely some hawkish rhetoric in his words, as Carney stated that “spare capacity is being absorbed a bit faster than anticipated” and “some tightening may be needed in coming months”. That said, Carney’s speech also had a dovish side to it, as he warned that there are still “considerable risks to the outlook”, whilst also noting that the UK’s growth rate is underperforming the average of the G7 economies.”

“This slower growth was framed in a similar way as the outlook painted in BoE’s August Quarterly Inflation Report, which noted that capacity constraints would probably be hit sooner due to reduced investment spending. – Suggesting that the Bank may have to accept a lower growth rate as even a lower growth rate is more likely to drive up inflation. In August, these remarks were largely ignored by the market.”

“Yesterday Carney’s remarks were on balance again interpreted as dovish, with sterling sliding during his speech.Given the “considerable risks” to the growth outlook, the market continues to observe the BoE’s warnings of a potential rate hike with a pinch of salt. Moreover Carney continues to hint at a very slow hiking cycle if the Bank starts one. However, we would argue that if the BoE is only trying to bolster the currency with some verbal intervention, it could be forcing its own hand – or put its credibility at risk. Hence, a single rate hike to back its words, could be in the cards relatively soon; such a move would basically undo the post-referendum emergency cut but would, by no means, signal that there are necessarily more hikes to follow. Our FX Strategist Jane Foley has upped her GBP forecast somewhat to GBP/USD 1.32 over a 12-month horizon (was 1.30), which also translates into a slightly lower EUR/GBP target of 0.95 (was 0.96).”