Mark Carney said Bank of England officials have room to loosen monetary policy if needed as concerns that Britain may leave the European Union piled further pressure on the pound.
“If we were in a position where the economy needed additional stimulus, we do have considerable room,” the central bank governor told lawmakers in London yesterday. Officials have “conventional policy” such as rate cut or quantitative easing or they could “adjust” the horizon over which the BoE aims to return inflation to the 2% target, he said.
The pound remained near its lowest level against the dollar since 2009, after plunging on Monday. With traders already pushing back bets on the timing of a BoE interest-rate increase, the prospect of the UK leaving the world’s largest single market is creating further uncertainty.
Policy maker Gertjan Vlieghe, testifying alongside Carney with Deputy Governor Minouche Shafik and official Martin Weale, said that if the outlook worsens, he would consider voting to cut the key BoE rate from its current record low of 0.5%.
“I have relatively little tolerance for further downside surprises,” Vlieghe told the lawmakers. “Should downside surprises continue then I think we will get relatively quickly to a point where I find it appropriate to respond to it.”
The BoE has kept its benchmark rate on hold for almost seven years. The market-yield curve shows a 25 basis-point rise is not priced in until 2019, with investors zoning in on the prospect of a lower rate.
The pound fell 0.4% to $1.4089 as of 12:08am London time. The currency dropped to $1.4058 on Monday. Gauges of pound volatility versus both the dollar and euro have surged to the highest levels since 2011, while the options market signalled more losses ahead for the pound.
“It’s safe to say that there is an element of referendum premium” in sterling, Carney said. While recent moves in options have “spiked to levels consistent with around the height of the Scottish referendum,” the persistence of the move is what matters,” he said.
Shafik told lawmakers that the exchange-rate changes have lagged effects so there is no mechanical link between the market moves and interest-rate policy. In written testimony, she said she “continued to believe it more likely than not that the next move in bank rate will be up — even if uncertainty about the behaviour of wage growth makes the timing of that move uncertain.”
Vlieghe said officials don’t think about the currency “in isolation.”
“We have to think about why the exchange rate is falling, we think it’s falling because of increased uncertainty,” Vlieghe said. While so far there’s little evidence of an economic impact, a weaker exchange rate “might partly offset other weakness in the economy,” he said.
The chairman of the Treasury Committee, Andrew Tyrie, said Carney and BoE deputy governor for Financial Stability Jon Cunliffe will appear before lawmakers on March 8 in a session devoted to so-called ‘Brexit.’