DCSIMG

Second opportunity for Carney to convince markets on interest rates

  • by DOMINIC JEFF
 

BANK of England governor Mark Carney will get another chance to stamp his authority on the markets this week with a repeat of the extraordinary commentary that followed his first policy meeting.

His brief statement in July – saying expectations of a rate rise to come next year were “not warranted” – drove a 3 per cent surge in the FTSE 100 index on the day.

The Bank has since unveiled a policy of “forward guidance”, saying it will not even consider raising the base rate from its historic low of 0.5 per cent until unemployment falls below 7 per cent.

Although there are a number of caveats, the Bank does not expect that to happen until at least 2016.

But traders have been sceptical of the new policy and are pricing in a change sooner than the guidance implies.

Carney has already had one chance to correct that, at his maiden public speech in ­Nottingham last week.

However, despite using clearer language than is usual for central bankers, analysts have still read between the lines and stuck to their view that a rapidly improving economy and dissenters within the monetary policy committee (MPC) will force rates up sometime in 2015.

Michael Saunders, an economist at Citi, said the possibility of an accompanying statement is the key factor ahead of this month’s MPC meeting.

“We know interest rates aren’t going to change and the likelihood of a majority vote for more quantitative easing is nil,” he said. “What we don’t know is whether they are going to make statements about market rate expectations on a regular basis, or only in exceptional circumstances.”

Carney’s failure to reinforce his message in Nottingham has left the London market nervously eyeing data showing that the UK economy is strengthening fast.

That is likely to be reinforced this week by purchasing managers’ surveys showing all three main sectors of the economy are in expansion mode.

Investec economist Philip Shaw commented: “In trying to influence expectations of rates, the MPC is battling ­better news on the economy, which continues to come in thick and fast.

“While our assessment is that there is sufficient spare capacity in the economy to ward off a rise in interest rates for some time to come, our main case view is still that the first hike will take place in the second quarter of 2015.”

Even if Carney’s assurances are taken at face value, the market will still be inclined to take a perverse “good news is bad news” view that an acceleration in growth presages an earlier move on interest rates.

However, Saunders does not believe the recent rate sell-off means that guidance has been ineffective.

Rather, he argues the policy has coincided with a dramatic improvement in the UK’s growth prospects.

“If the MPC had not begun guidance, market expectations probably would have risen even more,” he said.

 

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