Monday 23 October 2017

Sterling surges after remarks by Bank of England Governor Mark Carney

Bank of England governor Mark Carney Picture: PA
Bank of England governor Mark Carney Picture: PA

Jemima Kelly

Sterling surged to a three-week high and Britain's FTSE 100 stock index fell yesterday on a volatile 24 hours on the currency front, after Bank of England Governor Mark Carney said an interest rate rise was probably necessary and the bank would debate this "in the coming months".

The pound jumped by well over a cent after Carney's comments to hit $1.2971, its strongest since June 9, the day of the results of Britain's parliamentary election. That left it up 1.2pc on the day. By mid-afternoon yesterday €1 was worth around 87.7pence.

It comes just a day after the euro and bond yields surged on Tuesday after ECB president Mario Draghi said the reflation of the euro-area economy creates room to pull back unconventional measures without tightening the stance.

But the single currency fell back sharply yesterday after senior figures at the European Central Bank signalled the market had misjudged Mr Draghi's remarks.

Speaking at a European Central Bank conference in Portugal yesterday, Mr Carney said policymakers would need to look at the extent to which stronger business investment offset a slowdown in consumption, as well as growth in wages and labour costs.

The remarks showed a shift in emphasis since a speech last week when Mr Carney said now was not the time to raise rates.

He did not repeat that phrase yesterday, and markets immediately priced in a greater chance of an earlier-than-expected rise.

Short sterling interest rate futures plunged, particularly across the mid-2018 to 2019 contracts, indicating a steeper path of interest rate hikes.

"Our main message would be not to over-interpret the comments - there's definitely a disconnect when you look at what's happening in the rates market and the way the FX market is moving," ING currency strategist Viraj Patel said.

"There is a risk that the moves are a bit too aggressive relative to what the central banks are trying to tell us. In the case of the UK, this withdrawal of stimulus could just be one rate hike and not the start of a full-blown hiking cycle.

"So you've got to be careful about overshoots in these currencies."

Having touched a seven-month low against a resurgent euro, sterling jumped 0.9pc to 87.71 pence. (Reuters and agencies)

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