The Bank of England’s passivity has its critics, but its trademark inaction did at least prove decisive for the pound last week.
The currency’s fortunes had proved hard to gauge this summer. The slumping dollar and soaring euro have helped sterling retake the $1.30 level against the greenback while simultaneously seeing it test new depths against the single currency.
No such haziness with Thursday’s base rate decision, which saw the pound drop against both currencies. Some traders had given credence to the idea that June’s 5-3 vote indicated a hike was finally on its way. August’s shift to a 6-2 split, and accompanying downgrade of growth forecasts, put an end to that.
Balanced funds would have enjoyed the result: both gilts and the sterling-sensitive FTSE 100 jumped as the prospect of a higher base rate once again disappeared over the horizon.
Mark Carney’s words weren’t as forthright as this reaction implies. Because while the BoE revised down its predictions for both wage and economic growth, the central bank governor was again at pains to point out that rates could rise “faster than the markets expect” if its estimates turn out to be correct.
Setting aside the question of just how accurate those forecasts will prove to be, there are two things potentially going on here. One is that the BoE is simply trying to provide some support for the pound. The other is that it really is prepared to look past a sluggish economy and hike ahead of schedule.
A combination of the two is also possible, but the latter theory has been disproved again and again over the past decade.
There is another problem. Even by central banker standards, Mr Carney has courted a reputation for inconsistency ever since the failure of the BoE’s forward guidance policy in 2013. Last week’s move in the pound, which wasn’t in sync with the governor’s comments, could point to the future in this regard: a time when the central bank’s pronouncements finally fall victim to diminishing returns.
So why the renewed ambiguity? One motivating factor is, inevitably, Brexit. The uncertainty over the impact of the eventual settlement – or even how this shadow will affect investment decisions in the meantime – lends itself to equivocation.
That hasn’t been helped by a lack of transparency over the UK’s true negotiating priorities. The relationship between the BoE and policymakers has grown more tense since the EU referendum, but in one way they are very much aligned.
When it comes to the major policy decisions of our times, both are still trying to have their cake and eat it.
Dan Jones is editor of Investment Adviser