Mark Carney remarks spark fears of QE exit

Incoming Bank of England governor Mark Carney has triggered a rally in sterling by hinting that the UK could be set for an earlier exit from its quantitative easing (QE) programme than markets had expected.

Mr Carney, who takes over as governor of the Bank in July, has delivered a written statement to politicians that states that the UK must exit its unconventional monetary easing measures, as part of his grilling by the Treasury Select Committee today.

“The Bank will need to design, implement and ultimately exit from unconventional monetary policy measures in a manner that reinforces public confidence,” the statement said.

However, Mr Carney has also stressed that the UK’s eventual exit from the QE programme - which has seen the government buy up billions of pounds of its own bonds to effectively pump money into the economy - must be done without sending markets plummeting.

“Given the scale of the expansion of central bank balance sheets, it is understandable that there are concerns about the exit from unconventional policies,” the statement said.

“The primary objective of unwinding the stock of purchased assets is to maintain price stability as the economy recovers.

“A credible plan is needed in advance in order to maintain confidence. The exit needs to be achieved without disrupting the gilts market. Such disruption could lead to sharp movements in a range of other asset prices, or possibly threatens to financial stability.”

Kathleen Brooks, research director UK EMEA for said the statement left markets on the “back foot” as much coverage of Mr Carney had previously focused on his view that the UK requires further stimulus.

Sterling gained on the fears that QE could be unwound sooner than expected because the asset purchaing programme is inflationary in nature.

“We believe that an ‘exit’ from stimulative monetary policy is years away, especially with the economy being so weak and Carney was simply avoiding any concerns that he could monetise the UK’s debt,” Ms Brooks said.

Elsewhere, Mr Carney hinted that the UK’s monetary policy decisions regime, which revolves around monthly meetings of the Bank’s Monetary Policy Committee, could be set for change.

“Although the bar for change to any flexible inflation-targeting framework should be very high, it seems to me important that the framework for monetary policy - rightly set by governments and not by central banks - is reviewed and debated periodically,” he said.