July 11, 2020

Bank of England Comments Send the Pound Lower

LONDON — Barely four days in the job, Mark J. Carney, the new Bank of England governor, is already having an impact on markets here.

The pound dropped about 1.3 percent against the dollar and also fell against other major currencies on Thursday after the central bank said that any expectations that interest rates would rise soon from their current record-low level were misguided.

The statement, issued along with the bank’s monthly interest rate announcement, was itself a departure from previous practice and showed that Mr. Carney, who became governor on Monday, is already making his mark on procedures.

“The drop in the pound is byproduct of the comments, and the market reaction indicates just how eager it is for comments from the new regime,” Peter Dixon, an economist at Commerzbank, said.

The central bank decided to leave its main rate at 0.5 percent and also held its program of economic stimulus at £375 billion, or $570 billion. Recent data from the services and manufacturing industries had surprised some economists by showing faster rates of growth.

The bank said it decided to keep stimulus and the interest rate unchanged as “there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time.”

“In the committee’s view, the implied rise in the expected future path of bank rate was not warranted by the recent developments in the domestic economy,” the bank said.

Mr. Carney, a Canadian who succeeded Mervyn A. King as governor, is expected to communicate more clearly than his predecessor which steps the central bank might take to spur growth. The former governor of Canada’s central bank has also said he is a supporter of U.S. Federal Reserve-like guidance for how long interest rates may remain unchanged to give greater certainty to borrowers.

Many economists expect that Mr. Carney voted in favor of more quantitative easing, the Bank of England’s bond-buying program, at the two-day rate-setting meeting that started on Wednesday. But they also expect that he was outvoted, just as Mr. King was last month, amid some timid signs that a recovery is taking shape. The central bank will release minutes of the current meeting next month.

After barely avoiding a triple-dip recession this year, the British economy showed signs of improvement in June. The services sector unexpectedly grew at its fastest pace in more than two years, according to data from Markit Economics and the Chartered Institute of Purchasing and Supply. The manufacturing and construction industry also improved last month.

The housing market also showed signs of continued improvement. Approvals for home loans granted by banks rose more than expected to the highest level since 2009 in May, according to figures provided by the Bank of England. The average price for a home continued to increase in June, led by London, according to Hometrack, a research concern.

“The data has been stunningly good,” David Tinsley, an economist at BNP Paribas in London, said before the announcement Thursday. But he also said that it was too early to say the worst was over for the British economy and that he expected the Bank of England to expand its stimulus program in the future. “The situation is probably still more fragile than it appears,” he said.

Economic growth is still expected to remain weak as long as troubles on the Continent, Britain’s largest export market, persist and austerity measures continue to be a drag on the recovery. George Osborne, the chancellor of the Exchequer and the architect of Britain’s austerity program, last month announced additional spending cuts, including more public sector job cuts.

Real disposable household income fell 1.7 percent in the first three months of this year, the biggest drop since 1987, according to the Office for National Statistics. Inflation continues to hover above the central bank’s 2 percent target at 2.7 percent just as many consumers had their salaries frozen.

In another sign that not all is well among British consumers, Nicole Farhi, the upmarket fashion label, filed for a form of bankruptcy protection on Wednesday, the latest British retailer to face serious trouble as demand dwindles.

Article source: http://www.nytimes.com/2013/07/05/business/global/bank-of-england-keeps-interest-rates-at-record-low.html?partner=rss&emc=rss

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