MARK Carney has halted the pound’s recovery in its tracks.
The UK currency extended its decline into a second day after the Bank of England governor said on Thursday that the central bank may need to loosen monetary policy as it tries to contain the fallout from Britain’s decision to quit the EU. That halted a two-day rally in sterling, and left it more than 10% lower since polls closed on June 23.
While that’s a sign of a lack of confidence in the UK’s post-vote economy, a weaker currency may help cushion the effect of Brexit. Central bank action, designed to further insulate the UK, may be necessary within months, Carney said in his second televised address since the country voted to leave the trading and political bloc.
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“The comments clearly signal that the Bank of England has decided to loosen monetary policy to support growth,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi in London. “And it will look through a temporary period of higher inflation resulting from a sharp decline in the pound. Band of England easing will reinforce the weakening trend for the pound.” The pound fell 0.2% to $1.3291 as of 12.18pm GMT, after dropping 0.9% on Thursday. It tumbled the most on record on June 24, hours after the Brexit results, and on June 27 fell to $1.3121, the lowest since 1985.
The currency had already fallen after the June 23 referendum plunged the country into political and market turmoil, leading to the resignation of Prime Minister David Cameron.
The Conservatives are in the process of choosing a leader who, as the next premier, will have the task of negotiating the terms of Brexit. Sterling briefly pared its decline after one of the contenders, government minister Michael Gove, said he didn’t expect the exit trigger to be pulled this year.
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The pound’s decline does have some benefit for the UK economy because it makes exports cheaper to buy with other currencies. It’s already helped the FTSE 100 Index recover from its post-Brexit slump, with the gauge headed for its highest close since August.
“In terms of our export perspective in the short-term that’s only good for us,” Mark Wilson, chief financial officer of UK-based luxury carmaker Aston Martin Lagonda, said in an interview this week, referring to the pound’s decline. In the long-term, Brexit “doesn’t affect what we intend to do”.
Asked about the initial drop in sterling after the referendum result, Carney said big moves were to be expected and there was a need for the currency to “find a new level”.
“While the currency was moving, it wasn’t moving because of market technicals, it was moving because of opinions,” he said. “And when the market is functioning, you don’t want to get in the way of it.” UK government bonds advanced on Friday, pushing the yield on some nonbenchmark gilts below zero for the first time, as futures traders drove up the odds of a rate cut by the Bank of England’s September meeting to 82%, from 59% on Wednesday. The benchmark 10-year gilt yield dropped to a record-low 0.776%. The nation’s two-year gilt yield touched 0.05%, the lowest since 2012.
“As long as the markets believe in the almighty power of the central banks, it works,” said Benno Galliker, a trader at Luzerner Kantonalbank in Lucerne, Switzerland. “For the FTSE 100 it’s a bonanza. They sell most of their goods in the euro area and with this weak pound, it’s great for them.”
Bloomberg
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