“Now is not the time to start raising interest rates”

With one fell swoop the Governor of the Bank of England gave sterling another kicking yesterday, pushing the pound to fresh multiyear lows against the dollar and a 12 month nadir against the European single currency.

As we pointed out yesterday, Carney’s speeches in the past – the Mansion House speech in 2014 and the speech at Lincoln Cathedral last year – had shown him to be leaning towards higher rates sooner rather than later. The stymying factor had been inflation and Mark Carney chose to not ignore the lower headline inflation rate in favour of a rising core inflation rate.

Inflation is the be-all and end-all it seems. Indeed, if you include the references and appendices, the word ‘inflation’ is featured 110 times in Carney’s Peston Lecture. There’s something to be said for driving the message home.

Core inflation bumps higher

As luck would have it, the inflation numbers actually saw a rise in Core CPI – inflation discounting away food and energy prices – to the highest level since January of last year and we can see this number increasing as elements like higher business rents and the National Living Wage begin to become a factor. We will have to wait and see whether these turn the heads of policymakers.

In the meantime, we have today’s UK wage numbers to look forward to with the outlook set to have slowed further as August’s bumper number falls out of the calculations. It is also possible that gains in employment start to slow from here on in as the UK economy bumps up against the natural rate of unemployment at around 5.0%. This will not do anything positive for rate expectations or sterling. The figure is due at 09.30.

So how far does it go?

That’s the obvious question and something that I was asked as part of an interview yesterday morning on Bloomberg TV.

Predictions on GBP are little more than guesswork given the tail risks of the UK/EU referendum, and the campaign towards the vote is likely to be pockmarked by sudden dips in GBP.

Bearing that in mind and working on the basis that the UK votes to remain in the EU I think that we could see GBPEUR bottom out at 1.28 but recover from there and see a move back to 1.3750-1.4250 by the end of the year.

Likewise – and given the pace of dollar appreciation – we could see another 4-5% in USD strength vs GBP.

Canada to set out its stall

Today’s Bank of Canada meeting is an important signpost for the world economy, not just that of the Great White North. If the Bank of Canada cuts interest rates today then it gives credence to the ever increasing belief that this slowdown in global growth is becoming more entrenched. Canadian dollar has been crushed in the past months as the declines in commodity prices have kept it very much under the pump. That being said, should the Bank of Canada believe that additional loosening of monetary conditions is necessary, then market thoughts of additional easing elsewhere – New Zealand, Australia, the Eurozone, even the UK – will increase as well. The decision is due at 3pm London.

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