Forward Guidance fails to guide

13 February, 2014

Robin Haynes

Yesterday’s quarterly Bank of England inflation report gave the Pound a boost, as the spooky record of exchange rates rising whenever Mark Carney speaks continued. The conference became more about interest rates than inflation, with the Governor claiming “Forward Guidance” has helped businesses and the recovery, while at the same time confirming that interest rates would no longer be rising as a matter of course when unemployment falls below 7%, but instead when a “range” of indicators are met.

So, while the Pound had been climbing last year on the assumption that interest rates would rise once the jobless total fell, the “guidance” has now changed and become less clear. Nonetheless, markets took Mr Carney’s comments to mean that we could have a small interest rate rise early next year, and rates would be 2% by 2017. Higher interest rates tend to make a currency stronger, so this alone pushed the Pound up to new highs yesterday afternoon, giving us the best rates to buy Euros and US Dollars this year.

 In other news, the UK government and opposition, in a rare show of unity, will announce today that Scotland would not be allowed to share the Pound in the case of independence, in a bold move to persuade voters to keep the union. With a referendum less than a year away, whether an independent Scotland would hurt the economy in England and Wales or the opposite, has been a matter of much debate – it would seem likely that the Pound would be strongly affected one way or another.