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Sterling hit by Carney's "flip-flap"

Wednesday, June 25 11:34:43

Sterling inched lower today, adding to its biggest fall against the euro in more than a month after the latest salvo from Bank of England policymakers left investors increasingly confused over the outlook for interest rates.

With Britain's economy steadily improving, the game on the pound for the past few months has been a to and fro on expectations for when the bank will deliver a first, potentially small and precautionary, rise in interest rates.

Money markets suggest many investors expect that to be as early as November. However, a number of analysts and dealers say Governor Mark Carney has muddied the waters after two performances in a week that pushed market expectations on timing first one way then the other.

On Tuesday Carney pushed back slightly against expectations the bank will raise rates before the end of this year, saying the economy still has slack to work through.

Criticism of the governor by the head of parliament's Treasury committee made the front page of the Financial Times on Wednesday.

"Carney did himself no favours at all yesterday. People feel he is flipping and flapping over rates," said one London-based foreign exchange dealer.

"As a central banker you should seek to provide clear guidance and a consistent message. This guy is not giving that at the moment. The net effect today anyway is that people are less sure about a rate rise by the end of the year."

Sterling was around 0.2 percent lower against both the dollar and the euro on Wednesday. It fell to a one-week low against the dollar of $1.6952 while the euro rose to 80.315 pence, its highest in nearly two weeks.

The outlook for sterling looks positive though compared to the dollar, euro, yen or Swiss franc as markets still expect the BoE will be the first of the four major central banks to raise interest rates.

"At the end of the day this is the only central bank currently talking actively about raising interest rates," said Graham Davidson, a currency trader with Australian bank NAB in London.

"The market had been very long of sterling before yesterday's comments by Carney and it was only natural that we came off a bit. But I don't see us coming much further."

Worries that the UK housing market is again overheating, and will eventually need to be calmed by more than just tighter practical controls on mortgage lending, support the argument for a rate rise before year-end. The BoE's latest financial stability report on Thursday may provide more food for thought on that front. (Reuters)