The GBP exchange rate complex has fallen to post-referendum lows on news that the Bank of England will likely cut interest rates by August and even expand the dormant quantitative easing programme.
- Pound to euro exchange rate today: 1.1993, 24 hour low @ 1.1929
- Pound to dollar exchange rate today: 1.3285, 24 hour low @ 1.3206
- Pound to Australian dollar rate today: 1.7830, 24 hour low @ 1.7754
- Pound to Canadian dollar rate today: 1.7228, 24 hour low @ 1.7149
Pound Sterling fell back towards post-referendum lows on the warning that an interest rate cut to the 0.5% basic rate will likely be delivered by the Bank of England in the summer of 2016.
The Speech was released at 16:00 and markets immediately picked up on this section:
"In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer."
The promise of additional easing would most likely be delivered on at the next meeting of the Monetary Policy Committee on August 4th with most analysts predicting a 25 basis point cut to the interest rate and some suggesting an expansion of the quantitative easing programme will also be announced.
The news had an immediate impact negative impact on Sterling which will likely suffer as a result of an expected reduction in capital inflows that lower interest rates will prompt.
GBP/USD is now towards the bottom of its post-referendum range and will in all likelihood test the 30 year support level at 1.3040 in the near future.
It must however be noted that the FTSE 100 has moved higher to its best level since August 2015 as UK corprorates will welcome the prospect of lower interest rates.
However, Carney did have one caveat:
"I can assure you that in the coming months the Bank can be expected to take whatever action is needed to support growth subject to inflation being projected to return to the target over an appropriate horizon, and inflation expectations remaining well anchored."
So should sterling fall too far, and therefore push up inflation via making imported goods notably more expensive, the Bank may have to step back from cutting rates or expanding its quantitative easing programme.
Indeed, "the law is the law, the rules are the rules," said Carney saying any action will take place within the existing prism of the monetary policy framework.
Expectations that the Bank of England will cut rates by 0.25% in August have now reached sure-bet odds on money markets.
"Looser Bank of England monetary policy and related expectations – 50bp in rate cuts and GBP 100bn in new quantitative easing, according to our economists – are likely to weigh further on the GBP," says Steven Saywell at BNP Paribas in London.
"Sterling remains vulnerable to further weakness due to the negative impact on economic activity we expect to start to see in the data over the next couple of months. Risks remain for a move below 1.30 against the Dollar and towards 1.10 against the Euro," says Andy Scott, an economist with foreign exchange brokerage HiFX.
Further, Carney acknowledged the big moves in the currency following the referendum, but noted they were expected.
The markets functioned well Carney believes, "and when the markets function, you don't get in the way of the market."
Carney expects a material slowdown in growth and pick up inflation. To what extent, and what degree, will only be disclosed in August. So we will have to wait until then before he suggests a recession is coming.
Importantly, Carney says the Bank is not fatalistic on its assessment of this situation.
“Governor Carney issued a reality check to the market this afternoon, providing insight into the Bank of England’s management of the recent BREXIT vote," says Tobias Davis, Head of UK Corporate Treasury Sales at Western Union Business Solutions.
"The British bear was unleashed, driving sterling towards 1.3200 as an interest rate cut and quantitative easing starts to get priced into the market. Focus will concentrate on the impact on the real economy, as most analysts are predicting a recession within the next 6 months," says Davis.
This is Carney’s second intervention following the UK’s decision to leave Europe and GBP bulls will be hoping he can offer a second does of confidence.
Following the UK’s vote to leave Europe, Carney gave an assured appearance before the camera saying the Bank is prepared for any eventuality following the vote.
The frantic selling of sterling ceased after Carney told markets the Bank of England, “stands ready to provide more than £250bn of additional funds through its normal facilities.”
The BofE would also be able to provide substantial liquidity in foreign currency, if required.
“We expect institutions to draw on this funding if and when appropriate, just as we expect them to draw on their own resources as needed in order to provide credit, to support markets and to supply other financial services to the real economy,” noted Carney.