Carney's Comments not a Signal of Intent to Target a Stronger British Pound Exchange Rate

Mark Carney speech

The Bank of England mentioned they are aware of Pound Sterling's recent decline but it is wrong to confuse with this as a suggestion they will soon start targetting a stronger exchange rate.

Mark Carney caused a little excitement with his comments at the Bank of England’s Future Forum on Friday the 14th October that the central bank wasn’t indifferent to Sterling’s substantial slide in the wake of the Brexit referendum in June.

Some commentators jumped on the remarks and suggested they are indicative of a floor being put under the currency.

"Our job is not to target the exchange rate, our job is to target inflation," Carney said.

"But that doesn't mean we're indifferent to the level of Sterling. It does matter, ultimately, (for) inflation and over the course of two to three years out, so it matters to the conduct of monetary policy."

However, there is no evidence of a notable strengthening of Sterling to the comments - the Pound embarked on an inter-day recovery well before the comments which hardly extended following the comments.

Indeed, the UK currency traded below the previous day’s close against the US Dollar did manage to better the Euro which was weak across the board.

The reason we believe there was no 'Carney bounce' for Sterling was because the overall message was quite unambigous:

“We're willing to tolerate a bit of an overshoot in inflation over the course of the next few years in order to avoid (rising unemployment), to cushion the blow and make sure the economy can adjust as well as possible.”

Therefore, the prospect of higher inflation is unlikely to stop the Bank cutting rates further, let alone raise interest rates in the foreseeable future.

Higher rates tend to lead to currency appreciation; the promise of lower rates for longer suggests Sterling will therefore stay lower for longer.

If Carney were really concerned about the fall in the Pound then why did he also say he would allow inflation to overshoot the bank's 2% target?

There is close to 0% chance the Bank will target a stronger exchange rate in the foreseeable future.

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