Carney & Co. Grilled by Treasury Select Committee on their August Interest Rate Cut

Pound Sterling was put under pressure during the appearance before the Treasury Select Committee of members of the Bank of England’s Monetary Policy Committee.

Governor Mark Carney lead testimony to the Treasury Select Committee which held hearings on the August 4th Quarterly Inflation Report. 

The August QIR saw the Bank’s Monetary Policy Committee (MPC) deliver an interest rate cut and announce the expansion of the dormant quantitative easing programme.

The move triggered sharp falls in UK yields and the British Pound while it also further undermined savings accounts which were already struggling under record-low interest rates.

Carney appeared before the Treasury Select Committee alongside Sir Jon Cunliffe, Deputy Governor, Kristin Forbes and Gertjan Vlieghe.

The session began with one of Carney's fiercest critics - lawmaker Jacob Rees-Mogg - questioning whether the Bank had created its own climate of fear surrounding Brexit which may have been self-fulfilling, and indeed, destablising.

Carney responded by standing by his actions noting the measures have soothed the way for the UK to make a success of Brexit.

Carney also took the chance to welcome the better-than-forecast data that has emerged from the economy since the EU vote.

Ahead of the testimony, Jacob Rees-Mogg accused Carney and the MPC of acting too quickly by cutting rates in August.

"There was not sufficient evidence at that point that further monetary stimulus was needed and there are adverse consequences of abnormally low interest rates as well as beneficial consequences," Rees-Mogg told Bloomberg.

The Governor said the probability of the UK falling into recession have diminished thanks to the Bank's actions.

On the country's record 7%+ current account deficit Carney believes the deficit could fall below 4% going forward on Sterling depreciation.

Howeer, Carney also told lawmakers that there was still scope to increase BoE stimulus package but Kristin Forbes countered that the Bank’s war chest isn't limitless.

"Carney indicated he feels comfortable with the BoE’s Brexit assessment and with the policy reaction in August. Sterling initially lost marginally further ground as the headlines of the hearing appeared on the screens, but for now the changes are limited," says Piet Lammens at KBC Markets in Brussels.

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Bank Remains Key Downside Risk to British Pound

Policy moves at the Bank of England remains the driver for Sterling value at present. 

The Bank's decision to cut rates and boost quantitative easing prompted a fresh slump in the British Pound which fell to 2016 lows against the Euro in a matter of days.

Similar declines were noted in the GBP/USD exchange rate which traded below 1.30.

The policy measures were delivered to protect the UK economy from any material slowdown posed by the vote to exit the European Union.

The moves were justified as a pre-emptive strike by the Bank as the initiative was carried out without the benefit of any hard post-referendum data from which to calibrate.

However, since the August 4th decision we have received economic data that is unequivocally better than many had expected. 

The Bank could therefore stand accused of jeopardising savings accounts while sowing the seeds for  agressive inflation in the future by acting too soon and without the requisite hard data from which to base such important decisions.

All eyes now turn to the November QIR where some in the market expect the Bank of England to cut interest rates and boost quantitative easing once more.