Investor Poll Shows Carney Increasing Rates in 2015: U.K. Credit
International investors added their voice to those predicting the Bank of England will be forced to increase interest rates earlier than Governor Mark Carney is projecting, according to the latest Bloomberg Global Poll.
Almost a third of the investors, analysts and traders surveyed said the U.K. central bank will boost its benchmark rate from 0.5 percent in the first half of 2015, and more than two thirds predict an increase between now and the end of that year. That conflicts with Carney’s message that officials can wait until the end of 2016 as they pledge not to even consider acting before unemployment falls to 7 percent.
Financial markets are focusing less on his words and more on reports that show the economic recovery picking up steam. Gilt yields and the pound have risen since Carney unveiled his forward-guidance policy on Aug 7. Ten-year yields are at their highest relative to two-year notes in more than two years as investors demand more income to hold bonds for longer periods.
“Guidance has its limits,” said Marie Owens Thomsen, a poll respondent and chief economist at Credit Agricole Private Banking in Geneva. “Market participants think that growth in the U.K. is having a bigger impact on the labor market and expect the unemployment rate to drop faster than the bank.”
Carney argues forward guidance is helping to secure the economic recovery by persuading consumers and companies that they can spend without fear of borrowing costs rising in the next three years.
Data this week showed a house-price gauge produced by the Royal Institution of Chartered Surveyors rising to the highest level in almost seven years in August; unemployment declining to 7.7 percent between May and July from 7.8 percent; and construction orders surging almost 20 percent in the second quarter, boosted by demand for new housing, wind turbines and solar farms.
The implied yield on the short-sterling contract expiring in December 2015 has risen 65 basis points since Aug. 1 to 1.72 percent as investors add to bets on higher rates. Ten-year gilts yield 247 basis points more than two-year notes, the widest spread since July 2011, and 96 basis points more than equivalent German bunds. The pound has gained 7.4 percent over the past six months, the most among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.
“The market is offering some forward guidance of their own to the extent they’re saying we’re just not buying it,” said Erik Britton, a former BOE economist and now a director of Fathom Consulting in London.
One percent of poll respondents said the Bank of England will raise rates this year and 18 percent predicted action next year. Fifty-one percent said the first increase would take place in 2015. Only 15 percent said Carney will wait until 2016 or later.
Carney told lawmakers yesterday that by providing an insight into central-bank thinking, his strategy is supporting the economic recovery. He argued investors are pushing up borrowing costs because their analysis of U.K. unemployment and productivity outlooks differs from that of the BOE.
“By making policy more effective, we make it more stimulative and reinforce the recovery,” Carney told Parliament’s cross-party Treasury Committee in London.
Carney has found some traction among the public at large. The number of people expecting a rate increase in the coming year fell to the lowest level since the aftermath of the Lehman Brothers Holdings Inc. collapse in 2008, the BOE said in its quarterly Inflation Attitudes survey.
Twenty-nine percent said they expect an increase, down from 34 percent in May. A Markit Economics Ltd. poll of 1,500 people also found last month that only 40 percent of households expect a rate increase in the next two years, down from 53 percent in July.
While Carney’s flagship policy is being challenged, his standing among investors is on the rise, according to the Bloomberg poll. Fifty-nine percent said they had a favorable view of him, up from 50 percent in May, when he was preparing to take over the Bank of England.
The poll of 900 Bloomberg subscribers was conducted on Sept. 10 by Selzer & Co., a Des Moines, Iowa-based firm. It has a margin of error of plus or minus 3.3 percentage points.
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