Bank of England Governor Mark Carney may have caused financial markets to react excessively when he warned that interest rates could rise sooner than expected, a former BOE policy maker said.
“I think the markets are overreacting,” Adam Posen, president of the Washington-based Peterson Institute for International Economics, said in an interview with Bloomberg Television’s Guy Johnson and Olivia Sterns in London today. “I think he got the calibration wrong and didn’t fully price how big it was going to be.”
The pound posted its biggest weekly gain in four months versus the dollar, advancing to more than $1.70 today for the first time since 2009, after Carney said on June 12 that borrowing costs may rise earlier than markets expect. Investors increased bets on a rate rise as early as this year, Sonia contracts showed. Before Carney spoke, projections centered on a second-quarter increase.
“My understanding is looking at the charts that they’re pricing in interest rate rises early as November or December of this year, which I think is a vast overreaction,” Posen said today. “I’d calm down a little.”
Some economists have changed their predictions since Carney spoke. Credit Suisse Group AG and Commerzbank AG today predicted a rate rise in November instead of 2015.
The pound was little changed at $1.6970 as of 11:11 a.m. London after reaching $1.7011, the highest since Aug. 6, 2009. The earlier gain today followed comments from outgoing BOE Deputy Governor Charles Bean published in yesterday’s Sunday Times that he’d welcome an increase in interest rates as a sign that the economy was returning to normal. Sterling climbed 1 percent last week, the most since the period ended Feb. 14.
Posen said changes to the membership of the Monetary Policy Committee over the next couple of months may make the group’s stance more difficult to predict. Nemat Shafik replaces Markets Director Paul Fisher in August while Kristin Forbes joins next month.
Posen, who served on the MPC between 2009 and 2012, said the minutes of the panel’s June 4-5 meeting, due to be published on June 18, may show one or two of its nine officials voting to tighten policy. The BOE has kept the benchmark rate at 0.5 percent since March 2009.
“I think Carney doesn’t want to be on the losing side, but I don’t think he’s in danger,” Posen said. “You’re getting at least two new voters, people are not going to want to contradict Carney.”
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