The Bank of England Governor Mark Carney will next week give evidence to the House of Lords Economic Affairs Committee in its annual session with the Governor of the Bank of England.
Areas the session will cover include:
What risks are there to remaining in the European Union?
What risk does China pose to the UK economy?
Is the housing market still the biggest medium-term risk to the UK economy?
How important is membership of the European Union to London’s status as a leading international finance centre?
Are banks now too complex to fail?
When will inflation return to target?
Are any further changes to banking regulation required as a result of the revelations in the ‘Panama Papers’?
To what extent is the historically large current account deficit a concern?
The appearance is likely to be the fundamental highlight of the upcoming week for the British pound.
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Of significance to us will be Carney’s take on inflation and the UK current account.
It is the UK’s gaping current account deficit that leaves the British pound exposed to significant downside risks in light of the EU referendum.
In short the UK imports more than it exports, a scenario that typically places downside pressure on a currency.
However, GBP remains buoyed by a large flow of foreign investor capital. Were this to dry up due to the UK voting to leave the EU then the British pound could fall significantly further.
What Carney has to say about this will be of great interest to us.
Inflation is meanwhile the economic indicator the Bank of England are most concerned with as it is their mandate to keep inflation stable at around 2%.
With inflation barely above 0% the Bank has had to keep interest rates at record lows for an extended period. It is the promise of higher interest rates in the future that could see the pound move higher and recover from its malaise.
Rising inflation would see the Bank need to raise rates in order to cap price rises.
The most recent economic stats from the ONS show inflation ticking higher faster than economists had expected.
What does Carney make of this trend, will prices rise faster than anticipated. How does this bear on interest rate policy?
Any suggestions that inflation is turning higher could well see the British pound catch a bid.
Last week, as expected the BoE Monetary Policy Committee voted unanimously to maintain Bank rate at 0.5% and the stock of purchased assets at £375bn.
Markets continue to believe the Bank will only raise rates for the first time in 2020.
However, there are some analysts who believe this could happen as soon as this year.
On the issue of the referendum, interestingly, there was a little more discussion around the risks surrounding the EU Referendum at last week’s MPC decision.
The Bank notes that there was evidence of uncertainty weighing on activity with decisions on capital expenditure and commercial property transactions being postponed till after the outcome of the vote is known.
Will Carney expand on this? If he is shown to be more pro-EU we could see the pound rise.
However, in light of the fall-out from his apparent pro-EU stance in March we would expect his words on the matter to be incredibly guarded.