Bank of England policy maker Catherine Mann said the pound could weaken further as investors absorb the implication of plans by the US Federal Reserve and European Central Bank to raise interest rates.
(Bloomberg) — Bank of England policy maker Catherine Mann said the pound could weaken further as investors absorb the implication of plans by the US Federal Reserve and European Central Bank to raise interest rates.
“There has been a quite a hawkish tone coming from the Federal Reserve and ECB,” Mann said in an interview on Bloomberg TV on Tuesday. “An important question in regards to the pound is how much of that existing hawkish tone is already priced into the pound. If Fed hawkishness is not priced in, the pound could fall further.”
Mann warned she thinks there’s “more to go” on the UK currency’s weakness, and that would feed through to rising prices and inflation. The remarks build on Mann’s own concern that inflation in the UK will require further rate rises from the BOE.
Since falling to a record low of $1.035 during the September market turmoil sparked by Liz Truss’s fiscal plans during her short time as prime minister, sterling has bounced back as traders trimmed expectations for further Fed tightening. It currently trades around $1.20, with the median analyst forecast compiled by Bloomberg predicting it will rally to around $1.23 by year-end.
The pound was little changed in Tuesday trading after Mann’s remarks.
“With the BOE seemingly at the more dovish end of the central bank spectrum, sterling might continue to struggle against the euro and the dollar in the short term,” said Dean Turner, an economist at UBS. “Nevertheless, we still expect the pound to gain ground against these currencies by the end of the year.”
Over the longer term, the currency has depreciated significantly. The Bloomberg British Pound Index, a broad gauge of its strength, has fallen around 20% since the UK’s 2016 vote to leave the European Union.
Mann voted for jumbo rate rises last year and pushing the BOE’s nine-member Monetary Policy Committee to “front load” its hikes. She said the terminal rate is still “beyond the forecast horizon” and reiterated her view that “more needed to be done.”
Mann said the BOE may have to push harder on interest rates because the transmission mechanism has been partly affected by volume of long-term fixed rate loans taken during Covid. She also thinks companies have more pricing power, raising the risk that inflation remains more “persistent.”
Both small and large businesses were able to lock in low interest rate loans during the pandemic. Small companies took out around £50 billion of state-backed “bounceback” loans, with a 2.5% interest rate and duration of up to 10 years, and “the largest companies took advantage of low interest rates to put on a long-dated capital structure,” Mann said.
As as result, “the interest rate increases we are seeing today are not really hitting the economy” through the company channel. “That’s part of monetary policy transmission mechanism that I’ve written about.”
Households are also more protected against rate rises than in the past as four fifths were on fixed-rate loans of up around five years on average when the BOE started raising interest rates. The Bank for International Settlements recently said the scale of fixed rate lending “limits the pass-through of policy rate hikes.”
Mann said she was more focused on core inflation than the headline rate as an indicator of future price dynamics as she is “concerned about the extent to which there is strong pricing power among firms and acceptance of those price rises by a lot of consumers.”
She also signaled that she believes the UK is likely to avoid a recession, saying she in the “upper part of the fan charts,” that model the range of potential outcomes. The BOE’s central forecast is for a 0.5% contraction this year.
She said she’s worried about the UK economy’s inability to grow without sparking inflation, a legacy of Britain’s decision to exit the European Union and thousands of people over age 50 dropping out of the labor market since the pandemic. Mann said those people are unlikely to return to jobs in big numbers, but they could prove a problem for the government.
“I worry that a couple of years down the line, we’re going to see people trying to come back into the labor force, and that’s going to be much more difficult,” Mann said. “I worry about the supply side of the UK economy. It really is striking how slow growth is in the UK — much slower than what we observed for the US or for the euro area. Brexit is a factor on the supply side and on pricing power.”
While natural gas and goods prices are “on the downturn,” Mann said she’s concerned about the “strong pricing power of firms” and households’ willingness to accept further higher prices.
“Even in the face of the cost-of-living crisis, there still are a lot of people out there who are willing to pay higher prices and firms are willing to set those prices high,” Mann said.
When considering how the UK might fuel its growth over coming years, Mann said it was “important to be thinking about” lack of investment in the UK economy, pointing out that business investment has been weaker since the pandemic than might have been expected.
Referring to British companies such as technology firm Arm, which have recently chosen to list in the US rather than on London’s stock market, she said the “listing issues are relevant psychologically” to the UK’s prospects.
“The underpinnings of why (some companies) are not listing here need to be analysed,” Mann said.
Read more:
- Halifax Says UK House Prices Are Rising the Most Since June
- UK Inactivity Crisis to Get Worse Due to Demographics, ONS Warns
- UK Wages Rise More Than Expected in Added Sign of Inflation
–With assistance from Philip Aldrick, Greg Ritchie, Lucy White, Alice Gledhill and Andrew Atkinson.
(Updates with reaction from fifth paragraph and more comments from the speech beyond)
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