Alongside continued uncertainty with regards to the UK’s future trading relationship with the EU, currency markets will also now have to deal with increased volatility around the outlook for interest rate changes.
On 20th December 2019, Andrew Bailey was unveiled as the next Governor of the Bank of England, replacing former Bank of Canada Governor Mark Carney who will step down as of March 16th 2020.
Chairman Of MPC
In his role as Governor, Bailey will also be chairman of the Monetary Policy Committee, with responsibility for setting the Bank of England’s base rate for borrowing.
However, the result of his first outing as chair of the MPC will not be known until March 26th 2020, when the first interest rate decision after the commencement of his Governorship is announced.
In the interim, investors will be keenly scrutinising his statements for any indication as to what his attitude to interest rate changes and the UK economy as a whole will be.
Dove Or Hawk?
When it comes to monetary policy, Sterling investors are unsure if Bailey is a ‘dove’, in favour of lower interest rates, or a ‘hawk’, keen to raise borrowing costs.
It is possible that UK interest rates could go either way.
Although the current Bank of England base rate was held at 0.75% in the 19th December 2019 MPC announcement, two of the nine committee members did vote for an immediate reduction in the bank rate from 0.75% to 0.50%.
So if Bailey is minded to be “dove-ish” with regards to monetary policy, then he would only need the support of two more committee members for interest rates to be lowered.
However, despite Brexit uncertainty, the standstill transition period, which will last until January 2020, has reduced some volatility and it doesn’t look like Sterling is currently priced for a substantial interest rate cut in the coming months.
The overnight index swap market in Sterling suggests a March 2020 bank rate cut to 0.65%, well above the 0.50% that is being pushed for by more “dove-ish” members of the MPC. New Governor Bailey’s take on all this remains to be seen.