Well…that wasn’t supposed to happen – 3rd November 2017
Well…that wasn’t supposed to happen – 3rd November 2017
In the press conference yesterday that followed the news that the UK Monetary Policy Committee had decided to increase interest rates by 0.25%, Mark Carney, the Governor of the Bank of England, explained that the prime reason behind inflation running at 3% (and rising) and was the weakness of Sterling. How ironic then that an interest rate rise designed to lower inflation and increase the value of Sterling did exactly the opposite.
Following Carney’s comments, where he said that any future rises would be “at a gradual pace and to a limited extent”, Sterling fell against all major currencies. It lost 2.5 cents against the US Dollar and Aussie Dollar, 2 cents to the Euro and close to 4 cents to the NZ Dollar.
Immediately after the announcement, Sterling initially rose as MPC members voted 7-2 in favour of the first hike in a decade. The two members of the MPC who voted to leave rates unchanged were Sir Jon Cunliffe and Sir Dave Ramsden both of whom are Deputy Governors and the most experienced members of the MPC.
Governor Carney’s particularly dovish remarks were almost totally due to concerns over Brexit and the effect it is having and will continue to have for several years to come. As the Bank sees little change in the trajectory for inflation, it was decided that inflation wouldn’t start to fall on its own without help from monetary policy, hence the hike in rates.
The effect of the Brexit decision is having a serious effect on business investment although employment is at its highest level for forty years and more people are working than ever before in the U.K. However, the uncertainty going forward over what the outcome of Brexit will be is having a serious downward effect on both output and consumption. Once the picture becomes clearer the MPC will reconsider the continued economic effect and act accordingly.
In the US, President Trump has nominated Jerome Powell, a lawyer by profession, and a current Fed Governor as his choice to be Chairman of the Federal Reserve. Mr Powell is the pragmatic choice given his experience on the FOMC and his balanced approach to monetary policy where he favours both proactivity and advance guidance to the markets. The markets view if the he is the best “non-Yellen” choice.
Today sees the release of the US employment report for October. Given the revisions of sometimes up to 20% in the data the month after its release it should probably be renamed the “Estimate of Non-Farm Payrolls”. Analysts are expecting a massive change from September when 33,000 jobs were lost because of storms in the South West. The expectation is for a headline of 300,000 new jobs to have been created and a small positive revision to the September number.