U.K. Chancellor of the Exchequer George Osborne said that a tightening of market conditions too quickly could impede the economic recovery as he backed Mark Carney’s signature forward-guidance policy.
“These are still the early stages of recovery,” Osborne said today in London, according to extracts of a speech released by the Treasury. “Avoiding an unintentional and premature tightening of financial conditions,” while “staying the course with our deficit-reduction plan” will help counter domestic risks to growth, he said.
Osborne’s comments come a month after Bank of England Governor Carney introduced forward guidance and signaled interest rates won’t rise before late 2016. While investors are betting that rates will increase before then, the chancellor said the BOE’s message is getting through to consumers and executives and will help strengthen confidence.
“Some have interpreted more recent increases in gilt yields as a sign that forward guidance has somehow failed, but that is, I believe, a misunderstanding,” Osborne said. Recent market movements “vindicate the need for guidance: the counterfactual would have been even bigger increases in yields in response to positive economic data.”
U.K. gilts declined today, pushing the 10-year yield up 2 basis points to 2.96 percent, close to the highest since 2011.
Short-sterling futures have dropped in the past month, indicating investors are adding to bets on higher interest rates. The implied yield on the March 2015 contract has risen about 32 basis points to 1.13 percent in that period.
While Osborne said the economy “has turned a corner,” he cautioned that abandoning his austerity plans “would be disastrous.” He also said his decision to press on with spending cuts has been vindicated and that “tough choices” will be needed to lower the budget deficit even after the 2015 election.
The economy grew 0.7 percent in the second quarter, and surveys last week showed services expanded the most since 2006 in August and manufacturing accelerated to a 2 1/2-year high.
Bank of England Markets Director Paul Fisher said in an interview with the Sunday Times newspaper yesterday that consumer and business confidence numbers were “quite striking” and that guidance has helped convince businesses and households of the bank’s plans.
“The evidence suggests tentative signs of a balanced, broad-based and sustainable recovery, but we cannot take this for granted,” the chancellor said. “Plenty of risks remain, and more years of hard decisions lie ahead.”
Osborne also said euro-area turmoil has abated, though he highlighted the possibility of further turbulence. He noted the slowdown in emerging-market economies and the risk that instability in the Middle East will push up oil prices.
He also sought to counter criticism that his housing policies, describing his Help-to-Buy program as a “sensible, time-limited and necessary financial intervention.” The International Monetary Fund warned that the program, which follows the BOE-run Funding for Lending Scheme, may stoke home prices.