Bank of England Deputy Governor Charlie Bean said officials are sending a “clear signal” they won’t increase interest rates anytime soon as he acknowledged some surprise at the response of investors to that message.
The U.K. central bank is “communicating not just to market participants, but to people, to households and businesses, to give them a clear signal that interest rates are not likely to rise imminently,” Bean said in an Aug. 23 interview in Jackson Hole, Wyoming.
Less than a month since the BOE projected leaving its key rate at a record-low 0.5 percent until late 2016, investors are signaling skepticism officials will hold out so long. Yields on short-sterling futures contracts expiring in September 2015 have risen this month and are at the highest in almost nine weeks.
While Bean said he was “a little bit” surprised by the reaction of financial markets to the bank’s use of so-called forward guidance, he said officials were not “in the game of trying to manipulate market expectations.”
“What we’re trying to do is explain as clearly as we can, what are the factors that will guide policy going forward, recognizing the world is an uncertain place,” he said. “The question of whether what’s in the market is warranted or not depends very much on your view of how much scope there is for expansion before inflationary pressures start manifesting themselves.”
BOE Governor Mark Carney announced Aug. 7 that officials would not consider raising rates before unemployment reached 7 percent so long as price and financial stability weren’t jeopardized. The jobless rate was 7.8 percent in the second quarter and the bank doesn’t expect it to drop to its threshold for three years.
Bean was representing the BOE at the Federal Reserve Bank of Kansas City’s annual gathering of central bankers and economists. He told the meeting that although short-term gilt yields have moved up in recent weeks, the extent of any tightening should be tempered by the unemployment threshold “serving as a reminder of just how much growth is needed to regain lost ground.”
Still, Bean told the audience the BOE’s aim is to clarify what it reacts to when setting policy rather than trying to inject extra stimulus by pledging rates will be lower in the future than would be appropriate.
His comments come as Governor Mark Carney prepares for his first official speech in Nottingham on Aug. 28, with economists predicting he may use the opportunity to try to pull back market expectations for higher rates. The 10-year gilt yield rose to 2.76 percent on Aug. 22, the highest since August 2011.
“Mark versus the market will be the key event,” said Rob Wood, a former BOE economist now at Berenberg Bank in London. “We expect him to sound very dovish.”
Data last week showed the economy grew 0.7 percent in the second quarter, faster than initially estimated. Manufacturing, services and construction strengthened in the past month to underpin speculation that the economy maintained momentum.
“We have had a string of generally upbeat data in the last few months,” Bean said. “We’re looking at growth which will be getting back to historical averages as we go through into the second half of this year and into next year.”
Such a backdrop makes guidance “particularly valuable” because it’s when a recovery starts to gain traction that investors, consumers and companies may start anticipating higher borrowing costs which in turn hold back the revival, Bean said.
He noted how on a recent trip to Northern Ireland at least three executives told him guidance was “valuable” and that it would “make it more helpful for them to invest if they felt that rates would stay relatively low for some time yet.”
While the BOE has suspended its gilt-buying program at 375 billion pounds ($584 billion), Bean said if the economy suffered a “significant slowing” then policy makers may restart it. It’s “always an option on the table” and “definitely still there as a policy tool if required,” he said.
As signs of a recovery in the U.K. housing market mount, Bean said he doesn’t yet see any signs of an asset bubble forming given price gains are in line with general inflation. The bank is also looking for the number of property transactions to increase as a sign of greater activity, he said.
“We wouldn’t want to see a house-price boom emerging which would have potential problems further down the road,” said Bean. “I can’t say we see signs of that at the moment. At this stage you certainly wouldn’t say there’s a problem. Clearly it’s one of the things to look at as all the activity indicators pick up -- are there any signs of excesses starting to emerge.”
Bean sought to explain the response of markets to forward guidance by noting investors had anticipated some form of signal before its announcement and it would take time to digest the message. He also pointed to recent improvement in the economy.
There may also be differences between markets and officials over the outlook for unemployment. If the recent sluggishness of productivity remains “pernicious and persistent,” then as demand strengthens firms could have to take on more workers and the jobless rate will fall faster, he said.
“It’s possible that market participants may have taken the view that there’s less scope for a productivity recovery than” policy makers, he said. “In that case it might be perfectly reasonable given their beliefs to actually think we might be in a position of wanting to tighten earlier than if you take the view that there’s lots of productivity rebound to come.”
While some economists have suggested the 7 percent unemployment target is too high, Bean said it was legitimate because it fell between the current rate and the 6.5 percent BOE economists calculate to be the economy’s medium-term equilibrium. It’s a “sensible point,” he said.
Bean denied differences among policy makers should be a reason to question forward guidance. Colleague Martin Weale voted against the decision and others questioned the strategy before Carney took office last month.
“If this is part of the markets’ problem, I think one would want to disabuse them that this is an issue,” he said. “Inevitably the committee had some serious discussions.”
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