Central Bank Comments Trigger Currency Market Movement

Posted June 30, 2017

He said that "some removal of monetary stimulus is likely to become necessary" if growth reduces spare capacity in the economy, and that the bank's rate-setting committee would debate the issue "in the coming months". Conversely the Pound Euro (GBP EUR) exchange rate is trading at 1.1391.

Carney said the boom in auto loans is a major factor behind the pick-up in consumer debt, but that he remained "sanguine" about the banking sector's overall exposure to it.

He also used the speech to stress that the MPC's tolerance was limited when it came to inflation sitting above the Bank's 2% target.

Unsecured consumer credit rose to £1.7 billion in May from £1.5 billion in April as lower net credit card borrowing was outweighed by higher loans and advances. "If not - and we see a daily/weekly close above 1.3100 - a more significant re-assessment of the BoE hiking cycle may be underway and 1.35/38 can not be ruled out". Specifically, BoE Governor Mark Carney's indication that a rate rise may be in the works certainly triggered a reaction in the currency market with GBP/USD jumping to $1.2950 levels while the FTSE 100 slipped in reaction.

Asian markets are expected to follow in the footsteps of gains in the United States, underpinned by positive expectations on global economic conditions. "And lenders may be placing undue weight on the recent performance of loans in benign conditions".

The increase from 3 percent is meant to restore the "level of resilience" delivered before the FPC decision to exclude central-bank reserves from the measure, according to the report.

Although Carney stressed that mixed signals from certain areas of the economy would require the bank to maintain a "wait and see" approach to any possible rises, investor took this as the strongest sign yet that the BoE may be planning to raise interest rates for the first time since the 2008 financial crisis.

"There is a risk that the moves are a bit too aggressive relative to what the central banks are trying to tell us". Essentially, if business investment remains low along with wage growth then a rate hike may be off the table, not to mention the impact of Brexit talks on the situation.

Meanwhile, BoE Deputy Governor Jon Cunliffe said that the time was not right for a rate hike as it was better to wait-and-watch how inflation evolves.

Carney said the FPC's action did not in itself imply that monetary policy was also about to tighten.

Consistent with its previous commitment, restoring the level of resilience delivered by its leverage ratio standard to the level it delivered in July 2016 before the FPC excluded central bank reserves from the leverage ratio exposure measure: The FPC intends to set the minimum leverage requirement at 3.25% of non-reserve exposures, subject to consultation.

"We note that the Bank's hypothetical modelling of a fall in used auto values going well beyond anything seen historically - even during the financial crisis - nonetheless shows a relatively modest impact on capital ratios".