(Adds Hammond's comments, fresh quotes, details)
By Anirban Nag
LONDON Oct 6 Sterling fell to a 31-year low on
Thursday on fears of a "hard" exit by Britain from the European
Union and Prime Minister Theresa May's comments on the impact of
loose monetary policy, which some saw as a thinly veiled attack
on the Bank of England.
May, in a speech to Conservative Party delegates on
Wednesday, raised the issue of the side effects of ultra-low
interest rates and money-printing.
Although her spokesman later played down suggestions that
she was signalling changes ahead in monetary policy, it led to
speculation the government was against further interest rate
cuts, given the adverse impact on savings and pensions.
As a result, gilts came under pressure, with the 10-year
yield jumping to its highest since mid-Sept and
trading above levels seen on Aug. 4, when the Bank of England
(BoE) cut interest rates to record lows and announced an
asset-purchase programme to boost growth.
Some saw her comments as unusually blunt and an attack on
the BoE'S independence, raising more uncertainty for the
currency, which has been under pressure for months.
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"If you threaten the independence of the BoE, that's a
really big mistake," said ex-BoE policymaker David Blanchflower.
"There are consequences and costs to threatening the
independence of the Bank. There are costs to the country."
Asked whether May's comment were an attack on Carney and the
Bank, he said: "Of course it was, what else could it be? If
Carney says I've had enough, that would be a major negative
shock to the markets."
Carney, whose five-year tenure runs to 2018, has been
criticised by some political figures, who say he tried to
frighten the electorate into voting to stay in the European
Union in a referendum held on June 23.
British finance minister Philip Hammond tried to calm
nerves, telling Bloomberg Television on Thursday that he would
like Carney to serve a full eight-year term at the central bank,
rather than leave in 2018 as he originally agreed.
SEB currency strategist Richard Falkenhall said May's
comments should be seen in the light of recent criticism by
politicians of ultra-easy policies by central banks. In the
United States, Republican presidential candidate Donald Trump
has accused the Federal Reserve of keeping interest rates low
because of political pressure from the Obama administration.
"Central banks have been independent in most Western
economies for a few decades now, but we are seeing a shift in
politicians' views of late. We have to take May's comments in
that perspective," Falkenhall said.
Sterling fell 1 percent to $1.2622, with a Reuters
poll released on Thursday predicting more losses are in
store. The currency has lost 2.5 percent this week,
hurt by May's announcement on Sunday that the formal process to
take Britain out of the EU will start by the end of March.
The euro hit a five-year high while sterling's
trade-weighted index was stuck near lows last seen in early
Many economists and investors think May's government is
leaning towards a "hard Brexit" option, where Britain gives up
full access to the single market in order to impose full control
on its borders. Some fear that could hinder trade and constrict
the foreign investment needed to fund Britain's huge current
account deficit, one of the biggest in the developed world.
Economic activity has held up better than many had expected
since the June vote to quit the EU, but many policymakers are
anxious about the prospects for future investment. Subdued
investments are likely to hit growth and lead to job losses.
A report on Tuesday commissioned by consultancy firm Oliver
Wyman said Britain's financial industry could lose up to 38
billion pounds in revenue if the deal leaves it with restricted
access to the EU single market.
(Additional reporting by Jamie McGeever; Editing by Larry King)