Pound sterling falls further after Mark Carney says Bank of England may lower interest rates

Mark Carney has halted the pound’s recovery in its tracks.

The UK currency declined for a second day versus the dollar, after the Bank of England Governor said on Thursday that the central bank may need to loosen monetary policy as it tries to contain the fallout from Britain’s decision to quit the European Union.

That halted a two-day rally in sterling, and left it more than 10 per cent lower since polls closed on June 23.

While that’s a sign of a lack of confidence in the UK’s post-vote economy, a weaker currency may help cushion the effect of Brexit.

Central bank action, designed to further insulate the UK, may be necessary within months, Carney said in his second televised address since the country voted to leave the trading and political bloc.

“The comments clearly signal that the Bank of England has decided to loosen monetary policy to support growth,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “And it will look through a temporary period of higher inflation resulting from a sharp decline in the pound. Bank of England easing will reinforce the weakening trend for the pound.”

The pound fell 0.3 per cent to $1.3266 as of 7:23 am London time, after dropping 0.9 per cent on Thursday. It tumbled the most on record on June 24, hours after the Brexit results, and on June 27 fell to $1.3121, the lowest since 1985.

The currency had already tumbled after the June 23 referendum plunged the country into political and market turmoil, leading to the resignation of Prime Minister David Cameron.

The Conservatives are in the process of choosing a leader who will have the task of negotiating the terms of Brexit.

The pound’s decline does have some benefit for the UK economy because it makes exports cheaper to buy with other currencies. It’s already helped the FTSE 100 Index recover from its post-Brexit slump, with the gauge closing Thursday at its highest level since August.

Aston Martin Perspective

“In terms of our export perspective in the short-term that’s only good for us,” Mark Wilson, chief financial officer of UK-based luxury carmaker Aston Martin, said in an interview this week, referring to the pound’s decline. In the long-term, Brexit “doesn’t affect what we intend to do.”

Asked about the initial drop in sterling after the referendum result, Carney said big moves were to be expected and there was a need for the currency to “find a new level.”

“While the currency was moving, it wasn’t moving because of market technicals, it was moving because of opinions,” he said. “And when the market is functioning, you don’t want to get in the way of it.”

UK government bonds advanced on Thursday, pushing the benchmark 10-year gilt yield to a record-low 0.861 percent, as futures traders drove up the odds of a rate cut by the Bank by its September meeting to 77 per cent, from 59 per cent on Wednesday.

The nation’s two-year yield fell as much as 11 basis points to 0.094 percent, the lowest since 2012.

“As long as the markets believe in the all-mighty power of the central banks, it works,” said Benno Galliker, a trader at Luzerner Kantonalbank AG in Lucerne, Switzerland. “For the FTSE 100 it’s a bonanza. They sell most of their goods in the euro area and with this weak pound, it’s great for them.”

© 2016 Bloomberg