Bank of England Governor Mark Carney's comments at an event in Edinburgh indicate that rates will remain low until the first quarter of 2015, which in turn should lead to sterling eventually declining against the dollar, according to Chief Investment Officer Haig Bathgate.
Carney reemphasised that, as announced in November's inflation report, the central bank isn't just focusing on the blunt measure of a falling unemployment rate as the signal to start increasing rates. While that measure dropped to 7.1% at the end of last year, the bank's previously advised 7% unemployment as a level at which it would reappraise interest rates was a"threshold, not a trigger," he warned. Other measures such as capital expenditure and wage growth, which have been slower to respond to the recovery, will need to show signs of improvement rather than only consumption before a rate hike is considered, it was suggested during a lunch in advance of Carney's speech.
Sterling's strength (it has climbed about 10% against the US dollar in the last six months) should also help stall an interest-rate gain low by keeping a lid on inflation. A stronger pound means we pay less for goods denominated in foreign currencies, and since we import so much (one of the imbalances of the economy at present) that makes a very big impact on keeping the prices we pay in the UK down. However, this has also contributed to the largest current account deficit in over 20 years and runs counter to the Bank of England and governments desire to have a more balanced economy which is less reliant on consumption to fuel growth.
In the end though, we believe that the continuation of a low interest-rate combined with the twin deficit will lead to currency weakness compared with the US dollar in particular. We reckon that, in the absence of an inflation shock, the central bank ultimately wants sterling to decline, helping us sell more abroad and buy less from our competitors, which will contribute to a more balanced economic recovery.
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