Bank of England's Carney says UK rate rise is looming
Investors in UK markets were still digesting news of the decline in inflation when Mark Carney threw them another curveball yesterday.
In testimony to MPs, the Bank of England governor said the time for a rate increase is moving closer, sending the pound to a one-week high against the dollar, pushing UK stocks down for the first time in five days and hurting government bonds.
The moves contrast to those earlier in the day, when a report showing UK consumer prices stagnated in the 12 months through June offered ammunition to those BOE officials who favour keeping interest rates at a record-low 0.5pc for longer.
"The tone of his comments is strong," said Neil Jones, the head of hedge-fund sales at Mizuho Bank in London. "This was certainly not factored into the market. It was very much a morning of two halves." The pound added 0.6pc against the dollar to reach $1.5584 at midday in London yesterday, and touched $1.5603, the strongest level since July 7. The FTSE 100 Index dropped after the testimony, losing as much as 0.4pc from yesterday's close.
Investors don't see rates rising from a record-low 0.5pc until May 2016 at the earliest, according to forward contracts based on the sterling overnight index average, or Sonia. "The point at which interest rates may begin to rise is moving closer given the performance of the economy," Mr Carney said. This is "counterbalanced somewhat by disinflation".
Mr Carney's communication skills have fallen short of the hype that accompanied his July 2013 arrival in the UK.
He had to rethink his forward guidance linking monetary policy to the labour market after unemployment fell faster than forecast, while the need to unwind his 2014 Mansion House message that interest rates could increase within months led to him being dubbed an "unreliable boyfriend" by one lawmaker.
Benchmark 10-year gilt yields rose four basis points, or 0.04pc point, to 2.16pc. The 5pc security due in March 2025 dropped 0.38, or £3.80 per 1,000-pound face amount, to 124.645. The stagnation in consumer prices follows a 0.1pc increase in May and was in line with the median estimate in a Bloomberg survey of economists. (Bloomberg)