Today Mark Carney, the Governor of the Bank of England (BoE), gave a speech outlining the three types of uncertainty that influence economic performance (geopolitical, economic and policy uncertainty) and the steps the Bank has taken to address this uncertainty, and how the BoE can be expected to act in the weeks and months ahead.
Following this speech the Pound (GBP) dropped by 1%, FTSE 100 rose by 2.7% and the FTSE 250 rose by 1.68%.
In this post I explain why this has happened, why it was important that Mark Carney made this speech and what the effect will be in the longer term.
Before I start I’d like to thank Craig Waldren for this question and Murray MacLeod for the follow up. I’d also like to apologise to my friend in the financial sector for the simplifications I’ve made to try to make the general impact and policy easier to understand for a wider audience.
Why did Mark Carney make the speech?
As the Governor of The Bank of England (BoE), the UK’s central bank, and Chairman of the Finacial Stability Board, Mark Carney has a responsibility to fulfill the BoE’s mission “to promote the good of the people of the United Kingdom by maintaining monetary and financial stability.”.
At this time when the UK’s main political parties are engulfed in internal politics and the UK Prime Minister is widely viewed as lacking power and authority to make decisions it’s incredibly important that the BoE make their position clear to provide some more certainty to businesses and investors.
As Mark Carney’s speech brilliantly explains the biggest issue for companies and investors in the UK currently is the huge amount of geopolitical, economic, and policy uncertainty which is toxic for the economy. To counter this the Bank of England needed to highlight that it has a plan, the steps its willing to take under the plan and provide re-assurance about the stability of UK bank.
What did he say?
The speech is publicly available, the link is at the bottom of the page, and the majority of it is written in language most people will be able to understand so I would recommend that you read it for yourself if you have time but I’ve listed a few of the commitments below.
The BoE have a plan and are in control
Some of the most important points the speech made weren’t the specific content but rather that the BoE is providing regular, clear information about the economy, they have a plan in place and the believe the UK economy is better placed than it was before to weather the storm.
“In order to support market functioning, the Bank of England continues to stand ready to provide more than £250bn of additional funds through its normal facilities.”
Easing of Monetary Policy and Focus on Growth
The BoE will look to ease monetary policy (reduce interest rates) to support growth if appropriate with a longer term view on inflation.
“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.”
“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 why did the Pound drop by 1% if this was meant to stabilise the market?
In simple terms if the interest rate drops or is expected to drop relative to overseas then there is lower return on UK assets relative to thier foreign currency equivalents. So it’s absolutely normal for the value of the GBP to drop against other currencies when interest rate drops are announced or expected. Although as the Bank of England say in their own explanation:
“However, the impact of interest rates on the exchange rate is, unfortunately, seldom that predictable.”
So why did the FTSE rise?
This is a simplification but investors and companies could clearly see that the Bank of England has a plan it’s following, it’s providing updates, it’s focused on growth and it’s indicated that it will make additional liquidity (money) available to the large banking institutions to the tune of £250 billion through the existing mechanisms it has today.
Mark Carney’s continued dialogue with investors and the UK public will continue to help provide some reassurance that the Bank of England have a plan and are willing to execute against it to ensure stability and confidence in the UK financial markets. This is especially important while the UK government and opposition are embroiled in internal power struggles.
That being as Mark Carney acknowledged himself there is only so much the BoE can do to reduce uncertainty alone and the UK needs certainty of policy that the UK government need to provide.
In my personal view Mark Carney and the Bank of England are the only ones who are currently providing consistency and leadership at the moment and the BoE’s earlier statements are the only reason the currency and stock market did not drop significantly further.
I hope the irony that a very talented Canadian is the only one holding together the UK markets while the UK’s political leaders are asleep at the wheel isn’t lost on the UK public.
What’s your view?
I’ve tried to provide a very simplistic explanation as to what is happening and why but if you have your own view or have further questions I’d love to hear from you.
Sources and Further Reading
If you’d like to read the speech itself, more analysis on it and its impact I’ve provided a large number of links to stories from a variety of viewpoints below for your ease of reference.
- Uncertainty, the economy and policy – speech by Mark Carney – Bank of England
- Mark Carney – Governor, Bank of England – Bank of England
- How does monetary policy work? – Bank of England
- BOE’s Mark Carney Hints at Summer Rate Cut – The Wall Street Journal
- Pound falls as Bank of England hints at fresh stimulus measures – BBC News
- Uncertainty, Economy and Policy – UK Post Brexit – Proshare
- Brexit: Mark Carney Statement – BBC News
- Treasuries Rally as BOE Governor Sees Rate Cuts Ahead for UK – Barrons
- FTSE 100 hits 10-month high as Mark Carney signals Bank of England will cut interest rates after Brexit – The Telegraph
- Carney prepares for ‘economic post-traumatic stress’ – Finacial Times
- Markets Shift after Carney Speach – BBC News
- Mark Carney’s Brexit stimulus plan hits pound but FTSE 100 soars – as it happened – The Guardian
- How do changes in national interest rates affect a currency’s value and exchange rate? – Investopedia