The pound fell after Bank of England governor Mark Carney said the central bank was weighing up the merits of a “near-term stimulus” to revive the struggling UK economy.
Sterling was down 0.6% against the dollar (GBPUSD=X) to just over $1.30 in morning trading on Thursday after a copy of Carney’s speech was released by the Bank of England.
The governor, who is due to leave his post in March, warned a rebound previously predicted by the bank’s monetary policy committee (MPC) was “not, of course, assured.”
Carney said a “relatively prompt response” could follow from the bank if evidence builds that economic weakness could persist, fuelling greater expectations of a cut to interest rates.
He also said there was “sufficient headroom” to at least double the £60bn of asset purchases by the bank in August 2016 to stimulate growth.
That would mark the equivalent of around a 100 basis point cut to the bank’s main interest rate, according to the outgoing governor.
The economy had been projected previously by the bank to “pick up from current below-potential rates,” supported by an easing of Brexit uncertainty, modest global recovery and higher government spending, he said.
But Carney warned: “The economy has been sluggish, slack has been growing, and inflation is below target.
“Much hinges on the speed with which domestic confidence returns. As is entirely appropriate, there is a debate at the MPC over the relative merits of near term stimulus to reinforce the expected recovery in UK growth and inflation.”
He said risks remained from poor global growth and from the potential for uncertainties over future trading relationships to remain “entrenched.”
The comments on uncertainty appear to be a reference to the continuing limbo over Brexit, with Britain’s departure all but confirmed for 31 January but trade talks yet to begin.
David Cheetham, chief market analyst at XTB, said the speech had been “fairly dovish,” sending the pound to its lowest level of the year so far against the dollar.
“While this shouldn’t come as a huge surprise given that there has been a couple of MPC dissenters calling for lower rates at the past two policy meetings, it is the strongest hint yet for a rate cut in the not too distant future,” said Cheetham.