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Dovish Carney drives pound to lowest since April

It’s been a rough day for the pound.

The UK currency has fallen to its weakest level since Theresa May called a snap election in mid-April after a dovish intervention from Mark Carney in the increasingly heated debate over interest rates within the Bank of England.

The pound slipped 0.8 per cent against the dollar today to $1.2625 – its weakest level since April 18 – the day investors began snapping up sterling on hopes a general election would deliver a strengthened Conservative majority to steer through Brexit.

The currency had already fallen back somewhat after it became clear that Mrs May’s gambit hadn’t paid off, but today’s drop was less about politics and more about macroeconomics. Mr Carney, BoE governor, kicked off the morning saying “now is not yet the time” to tighten monetary policy.

His comments were the first since three members of the BoE’s rate setting committee voted to hike interest rates from their historic lows on concerns of climbing inflation. The hawks were outnumbered by five other votes, but it market the tightest decision in six years.

Warning of a slowdown in consumer spending and disappointing wage growth, Mr Carney urged caution in any shifts to monetary policy at his Mansion House address this morning.

“I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations”, said Mr Carney.

Despite the emergence of hawkish elements in the ranks of the Monetary Policy Committee last month, most analysts expect a personnel shake-up on the committee to shift the emphasis back to “neutral”.

Kristin Forbes, an external MPC member who voted to raise rates, will leave the bank at the end of the month. She will be replaced by academic economist Silvana Tenreyo, who despite making few public pronouncements about monetary, has warned of the impact on the economy from Brexit.

The BoE cut its base rate to a record low of 0.25 per cent in the aftermath of the Brexit vote. It also re-started a bond-buying programme and launched a “term funding scheme” for retail banks to access cheap loans.

Following last week’s rates decision for no change, analysts at Barclays posited that the MPC was probably “over-promising but under-delivering so as to provide support to the pound to mitigate risks of an inflation overshoot”.

Chart: Bloomberg