Not many days ago the Governor of the Bank of England caused a seismic shift in expectations over monetary policy by publicly stating that he was surprised by the sanguine nature of interest rate pricing through the end of the year. In what seemed a radical change of heart, Mark Carney delivered his annual Mansion House speech to the Mayor of London and bankers a strong message that the money market was not pricing in the potential for a turn of the monetary screw as the economy recovers. Short sterling interest rate futures traded on record volume according to the LIFFE exchange data with implied yields surging by around one-quarter of a percentage point as investors reacted to Mr. Carney’s upbeat assessment of the domestic economy. In response to the prospect of a sooner than thought widening in yield differentials, the pound also jumped and reached its highest value against the dollar since October 2008.
On Tuesday, along with other members of the Monetary Policy Committee, Governor Carney has thrown cold water on his Mansion House assertion by saying that a string of below par wage data suggests that spare capacity is possibly greater than the Bank had previously estimated. And if that’s the case, rates are likely to go up not quite as quickly as previously thought because it would make more sense to use up spare capacity ahead of tightening monetary policy.
The pound(CME:BPU14) eased from $1.7020 ahead of testimony to the House of Commons treasury select committee to $1.6980 and also pared its recent advance against the euro currency. Despite the weaker tone to the British pound, short sterling futures recovered little, climbing by only 1-2 bps compared to the earlier 25-basis point decline post Mansion House. It seems that the currency headlines depicting the confusion over the timing of the Bank’s first interest rate increase don’t quite do justice to what the money market thinks.
Chart – pound slips versus the dollar after Carney’s testimony to the House of Commons committee