The Impossible Splits of Mark Carney

In view of low unemployment and rising wages, the Bank of England would do nothing more than raise interest rates. However, due to the uncertainty about Brexit, the bank is in a difficult position.

Mark Carney, the governor of the Bank of England, will take a decision on interest rates on November 1 with the rest of the central bank board. When you look at the job market, it seems to be a very easy choice. Unemployment hovers around 4%, which is the lowest level in about 40 years.

Employers are finding it increasingly difficult to find staff, which means that wages rose by more than 3% last quarter. This is usually a harbinger of rising inflation. In this regard, Carney has every reason to raise interest rates.

Huge surprise
Despite wage growth and a tight labor market, an interest rate move would come as a surprise. That has everything to do with the uncertainty about the coming Proposed referendum on United Kingdom membership of the European Union† On March 29, 2019, the United Kingdom (UK) will leave the European Union (EU).

However, it is still unclear how the relation between the two parties will look like. This is mainly due to the situation at the border between Northern Ireland and Ireland. The EU does not want strict border controls, while the UK does not want to create a backstop in the Irish Sea.

big shadow
Uncertainty about the future is increasingly casting a shadow over the UK economy. The independent think tank EY Item Club recently lowered its growth forecast for the current year from 1,4% to 1,3%. That would be the lowest growth rate in nearly 10 years.

There is a danger that consumers and companies will postpone spending if a decent solution is not seen quickly. In this scenario, 2019 threatens to be a bad year for the economy. Carney doesn't want to risk making matters worse if he further slows down already modest growth with a rate hike.

Pound under pressure
The lack of rapprochement between the two camps reduces the chance of an interest rate hike. In mid-October, economists on balance expected interest rates to rise at least once over the next 12 months. Now that chance is just over 1%.

Op markten the uncertainty and diminishing chance of an interest rate move, the pound has already lost 2% (against the euro) in recent weeks. The currency could fall further if Carney voices his concerns about Brexit.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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