First up, lemme give y’all a brief background of Mark Carney.
Carney was actually the central bank governor for the Bank of Canada before being pirated and wooed to hop over the Atlantic to join the Brits. This was actually a major surprise, as many expected Deputy Governor Paul Tucker to take over the top post. Carney’s appointment marks the first time in the central bank’s 319-year history that a foreigner will sit as head of the Bank of England.
Word on the street is that the Brits wanted someone who was credible and whose reputation wasn’t tainted by the recent scandals that have plagued the London financial district over the past year. Considering how Tucker was linked to the LIBOR settlement issue, I suppose that Carney’s clean slate was the deciding factor.
Now that Carney is scheduled to step to the plate for this first announcement as BOE Governor, what can we expect?
Take note that over the past few months, the BOE has been stuck in a stalemate, with the MPC voting 6-3 in favor keeping monetary policy steady.
Considering that this is Carney’s first statement, it is likely that he may want to first set the tone for his term. In fact, critics have observed that one of Carney’s favorite tools of communication is to manage market expectations by hinting what direction monetary policy will head towards.
The question is, what direction will that be?
On one hand, when Carney was BOC Governor, he took a very cautious approach, and wasn’t aggressive with regards to lowering interest rates to boost the economy as compared to other central banks around the world.
On the other hand, many economists, including those from the World Bank and HSBC, have recently downgraded global growth forecasts. With the threat of weakness abroad, we may see the BOE keep an aggressive stance.
Even though there will be a change in the BOE’s regime, the central bank is unlikely to make any major changes with regards to monetary policy. The BOE still has to publish its analysis on the economy, along with its quarterly inflation report, with Carney serving as its head. In addition to this, leading indicators have been generally upbeat and the CPI has been tracking higher. What we can expect, however, is for the BOE to give the market some guidance as to where monetary policy could go in the future.
That being said, keep your ears open and examine Carney’s tone as he has been known to project where rates and QE is headed. If he turns out to be hawkish, and hints at a rate hike sometime in 2014, the pound could get a slight boost and support could hold. However, if he says something dovish, the trend line could break and Cable could end up testing 1.5000.