Those who expected an ultra-dovish governor to take control of the Monetary Policy Committee (MPC) were grossly disappointed.
Residents of the United States, please read this important information before proceeding
First, despite introducing forward-rate guidance, the existence of three qualifying “knockout” factors (two of them arbitrary) muted the guidance. Second, the August Inflation Report press conference revealed that Mr Carney himself may not be as dovish as expected. Third, the last MPC minutes showed that the committee is not fully united behind the guidance. One member voted against the guidance, while others saw the recent increase in expected short-term rates as justified by economic fundamentals. The latter is of particular importance: it challenges the very concept of “forward guidance” (i.e. a central bank attempting to anchor expected shortened interest rates – see Taper caper) as well as the leadership of governor Carney.
The market, by and large, ignored the forward rate guidance, and yields rose across the curve (Figure 1). As we write, the market continues implicitly to price in a first rate hike materially earlier than indicated by the BoE.
Figure 1: UK yields rising across the term structure
Source: Barclays, Factset
Figure 2: UK data continues to beat market expectations
Less dovish governor Carney is good news for GBP
For GBP, all of this results in a brighter outlook. A less-dovish governor Carney, dented credibility of the forward-rate guidance and increasing UK yields are supportive of GBP. Even if Carney does attempt to further talk down rate expectations, he may remain unsuccessful. Barring another substantial round of QE, the further up the yield curve you go, the greater the extent to which the local and global business cycle, rather than central bank action and words, determines the direction of yields. If the UK economy is recovering, and doing so at a relatively firm inflation rate, rising long-term interest rates should be supportive of GBP against most G10 currencies.