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Bank of England governor Carney’s speech reinforces rift among policymakers

  • Governor Mark Carney's Mansion House speech highlights divide within BOE
  • Market reflects decreased expectations of near-term interest rate rise

Bank of England (BOE) governor Mark Carney's clear message to the City during his annual Mansion House speech on Tuesday was that talk of an imminent rise in U.K. interest rates was premature.

His position stands sharply at odds with that of departing BOE policymaker Kristin Forbes who has re-emphasized her ongoing concern both during her final BOE meeting last week and in subsequent comments to the press that the U.K.'s central bank is underestimating the pernicious effects of inflation on consumers.

Following the 5-3 vote in favor of holding interest rates at last week's BOE meeting, the market had finally began to digest the message that the central bank had tried to spell out within its May statement – that a rate hike could be sooner than traders seemed to be betting.

Yet, Tuesday's speech resoundingly brought market expectations back to the view that a rate hike was still sufficiently far off in the distance, Peter Chatwell, head of European rates strategy at Mizuho International, told CNBC via email on Tuesday.

"He has stated his concern about inflation being subdued - this being a reference to weak underlying inflation and wages - and is contradictory to the analysis presented by the outgoing hawk Kristen Forbes."

Carney also made clear his reluctance to tighten monetary policy during the early days of Brexit negotiations, noted Chatwell, adding that the effect should be to underpin risk appetites.

"This should allow the U.K. gilt curve to retain a steeper yield curve slope between the government bonds with 2 year and 10 year maturities and allow riskier assets in the UK to trade firmly going forward," he estimated.

The BOE announced on Monday that Forbes would be replaced with Silvana Tenreyro, who is expected to tend towards the more dovish side of the policymakers' scale, according to George Buckley, chief U.K. economist at Nomura.

"New members typically vote with the Monetary Policy Committee (MPC) overall," explained Buckley.

Although Mike Riddell, fund manager at Allianz Global Investors is less sure.

"There's a lot of speculation on whether Silvana Tenreyro is likely to be a dove or a hawk. The truth is that nobody really knows, albeit either way she's is likely to be less hawkish than Forbes," he stated.

In breaking down the MPC's likely voting tendencies, Buckley pointed out that external MPC voting member Gertjan Vlieghe is dovish, while after today Carney can unambiguously be described as very dovish.

"I suspect that when Carney, Ben Broadbent and Jon Cunliffe decide that the time is right for a hike they will all vote for it in unison whilst Andy Haldane remains a dove. So all in all, I would expect only Ian McCafferty and Michael Saunders, both of whom voted for a rate rise alongside Forbes in June, to vote again in favor of one at the next rate setting meeting in August," he added.

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Meanwhile Riddell believes the first rate hike has now been pushed out to the back end of 2019 and suggests watching for other nearer-term monetary policy actions.

"We still think it is more likely that the BOE launches another quantitative easing (QE) program in the next few years than hikes rates, given the likelihood of a material slowdown as negative real incomes begin to bite," he opined.

The U.K. currency failed to take the dovish tone of today's speech in its stride with the currency 0.61 percent weaker at $1.2653 by 1:30 p.m. local time on Tuesday. The FTSE, which tends to trade inversely to sterling due to the domination of the index by exporters, was in fact trading slightly lower today, down just over a tenth of a percent by that time.

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