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The Unreliable Boyfriend Turns Up to the Party

2 November 2017 by Gary Kirk

Although the headline rate hike ‘followed the script’ and was in line with the overwhelming consensus, the subsequent MPC press conference delivered by Mark Carney turned out to be far more interesting than we imagined.

It was mildly interesting that he finally reversed the emergency rate cut that was introduced in the aftermath of the UK referendum on EU membership result; and so delivered the first UK rate hike in a decade. But it was more interesting that having got himself out of the corner he had seemingly boxed himself into, by finally delivering the rise, he now seems to have put himself straight back into that corner again!

Now I have generally been in support of Mr Carney; I think his open and candid approach has been a refreshing change and his forward guidance has been overall supportive during a challenging period. However, today I think he was more candid than he needed to be and went far further than any other Governor I care to remember would have gone. I cannot think of any of his previous incumbents who would specifically mention, as he did, that “two more 25bps rate rises will be needed over the next three years” to return inflation to target and avoid the economy from overheating. Only time will tell if the market will hold him to the ‘two more hikes’ but it does seem that he has set himself up for some unnecessary scrutiny and criticism.

Such rate rises would obviously be very gradual, as expected, and it is not overly surprising that 10yr Gilts only moved 60c higher (7bps lower in yield) – but with the Brexit negotiations to be concluded within this 3-year period, it is a brave Governor who predicts how many rate hikes will take place subsequent to this, and other, unforeseen events. For us the uncertainty remains.

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