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Bank of England's McCafferty would fear further sterling rise

A pedestrians walks past the Bank of England in the City of London January 28, 2014. REUTERS/Paul Hackett
A pedestrians walks past the Bank of England in the City of London January 28, 2014. REUTERS/Paul Hackett

By David Milliken and William Schomberg

LONDON (Reuters) - Further sterling strength would be a worry and could potentially make the Bank of England delay raising interest rates, BoE policymaker Ian McCafferty said in some of the central bank's most forceful recent comments on the pound's rise.

Boosted by Britain's economic recovery, sterling has strengthened by more than 10 percent against the currencies of its main trading partners in less than a year, and earlier this month it hit its highest level in more than five years.

"Were it to continue to rise, I would get more worried," McCafferty told Reuters in an interview conducted on Monday afternoon.

"It's clearly a consideration in terms of total monetary conditions in the economy so we would need to take it into account when determining what the appropriate monetary stance would be going forward," he said.

The BoE has stressed it is in no rush to raise interest rates - a point McCafferty reiterated - but last year's unexpected rebound in British economic growth has driven expectations that it might tighten policy before the U.S. Federal Reserve or the European Central Bank.

Earlier this month the BoE said it would only raise interest rates when there was less slack in Britain's economy, which has still not recovered from the financial crisis. Monetary conditions - a mix of market interest rates and currency strength - also play a big role in BoE decisions.

"I don't think to my mind at present (sterling is) a major problem for British exporters. But were it to rise further ... then I think it is something we would need to study quite closely," McCafferty said

McCafferty added that smaller firms needed a stable currency to break into overseas markets, an important part of the British government's plan to rebalance the economy towards exports and put the country's recovery on a solid footing.

"If you go back 30 years, you have times when they have tried to break into markets at one level of sterling, and when they have done it - which may take a year or two - all of a sudden their margin has been taken away."

McCafferty declined to specify a level of sterling against the dollar or euro at which alarm bells would start ringing.

"I don't have a target for the exchange rate."

Earlier this month BoE Governor Mark Carney said sterling's strength was holding back net exports, but also stressed its role in keeping down inflation by lowering the cost of imports.

In December, the Monetary Policy Committee said "any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery".

The MPC did not repeat this comment in minutes of its January or February meetings. Sterling has risen by 2 percent since December's meeting.

(Editing by Jeremy Gaunt)

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