BoE: Sharply weaker pound becoming more of a UK policy focus - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound continues to trade on the defensive in the near-term although it has at least stabilized at weaker levels over the past week following the flash crash.

Key Quotes

“The sharp weakening of the pound has captured more attention in recent comments from policymakers in the UK. BoE Governor Carney stated in speech on Friday that “our job is not to target the exchange rate, our job is to target inflation….but that doesn’t mean we’re indifferent to the level of sterling. It does matter, ultimately, for inflation over the course of two to three years out, so it matters to the conduct of policy.”

The BoE signalled clearly that it was willing to tolerate a temporary inflation overshoot in their August Inflation report which did not prevent them from easing monetary policy aggressively. However, it will be more difficult to justify another rate cut in November with the weaker pound and stronger economic growth in the nearterm likely to result in an even larger forecasted inflation overshoot. We expect the BoE to tread carefully and leave rates unchanged in November taking into account the risk that a rate cut could destabilize the pound again the near-term.”