UK Pound: UK ‘Forward Guidance’

Consensus Forecasts

Despite further signs of recovery in the UK economy, which encouraged the IMF to upgrade its 2013 growth forecast to 0.9%, the pound tumbled below UK£1.50/US$ in early July. Its decline came partly in response to the Bank of England’s announcement that it intended to offer ‘forward guidance’ as to policy under leadership of its new governor Mark Carney. (Mr Carney advocated the use of ‘public communications’ as a policy tool during his previous governorship at the Bank of Canada and is tasked with fostering a sustained recovery in the UK economy, as well as bank regulatory reforms.) Investors interpreted last week’s statement that rates will be kept low, even as the UK starts to recover as a clear indication that liquidity conditions will not be tightened any time soon. No comment has yet been made on the conditions that might proceed a rate change, which could include targets for employment or growth or inflation. However, a commitment to the status quo seems to have been enough to inform the markets, which were unsettled by speculation regarding a reduction in quantitative easing in the US. The UK expanded at a lower rate than expected in Q1 2013 (third box left), but Q2 indicators show that the economy is recovering, with an upswing in construction, manufacturing and services in June. The minutes to the Bank of England’s July meeting, as well as the next quarterly inflation report, are likely to provide clues as to how ‘forward guidance’ will be managed. In all, the consensus is predicting that the pound will remain near current levels over the next twelve months.

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