Hawkish comments from BoE Governor Carney gave sterling a boost late last week. However, the BoE will use macro-prudential policies to cool the housing market before resorting to interest rate hikes.
At his annual Mansion House speech, Chancellor Osborne pledged to give the BoE greater powers to regulate mortgage lending in order to remove the froth from the housing market. This would entail setting limits on loan-to-value and loan-to-income ratios to discourage excessive borrowing.
Despite being given new policy levers, BoE Governor Carney also warned that he could raise rates sooner than the markets currently expect (which was April 2015). Not surprisingly, sterling reacted positively to Carney’s comments.
Our FX strategists think it is premature to conclude that a BoE tightening cycle is imminent. While the housing market is hot, the economic recovery in the U.K. is unbalanced and inflationary pressures are muted. For example, the trade deficit is at record levels and industrial production, while up from the lows, remains 12% below the pre-crisis peak. Meanwhile, CPI inflation is back below the BoE’s 2% target and wages ex-bonuses are rising by just 0.9% yoy.
Bottom Line: The BoE will use macro-prudential policies to cool the housing market before resorting to interest rate hikes. Our F/X strategists recommend staying out of the sterling market for now.