Pound V euro: GBP softens as Jon Cunliffe seeks to calm rate hike excitement
THE prospect of a rate hike in November should not be taken for granted, Bank of England (BoE) Deputy Governor for Financial Stability Jon Cunliffe has stated.
The pound to euro exchange rate has fallen this morning after the markets lowered the odds of monetary tightening at next month’s Monetary Policy Committee (MPC) meeting.
GBP/EUR has edged down -0.1 per cent to €1.121.
Members of the committee had hinted several weeks ago that a near-term rate hike is likely, but weak economic data released in the interim has seen expectations of a hike waning recently.
Mr Cunliffe has attempted to further reign in expectations of higher borrowing costs.
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[Interest rates] will not need to go up by as far and as fast as they did before the crisis
He told the Western Mail: “[Interest rates] will not need to go up by as far and as fast as they did before the crisis, but over the forecast period of three years rates will need to rise.
"The exact timing of when that starts? Well, that for me is a more open question.”
Policymakers are reticent to raise interest rates for the first time in a decade in part because there are signs consumers are using credit to fuel spending as real wages continue to fall.
Strong levels of consumer spending are vital to keeping the UK economy in growth territory, with the services industry accounting for more than 75 per cent of gross domestic product.
Rising borrowing costs would therefore put strain on indebted households, but also on businesses, which may lead to a drop in employment and therefore soften already lethargic wage pressures in the labour market.
Tomorrow’s finalised third-quarter GDP figures and the index of services for August could further weigh on hike bets if they suggest further weakness in the economy.
While the presence of the key European Central Bank (ECB) monetary policy meeting this week is keeping markets wary of buying into the euro before any changes to stimulus can be announced, today’s PMI data from IHS Markit has helped to undermine GBP/EUR exchange rates.
Eurozone services and composite indices weakened more-than-forecast, but remained firmly in growth territory at 54.9 and 55.9 respectively, while the manufacturing index climbed unexpectedly to 58.6.
Markit also reported that the rate of job creation in the currency bloc reached its highest level in ten years.
IHS Markit Associate Director Andrew Harker said “The Eurozone economy has had a good year so far, and the initial signs are that this has continued at the start of the final quarter of 2017.
“The PMI signalled a further strong increase in output across the private sector in October.
“Later this week, the ECB looks set to announce a scaling back of bond purchases for 2018, a move that would appear to be justified based on this latest set of PMI data.”
The latest Ifo German business sentiment survey results will be released tomorrow morning.
While these may generate some euro movement, being published in such close proximity to the monetary policy meeting this week could mute their impact.
