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Carney Guidance Threshold Strained as BOE Holds Policy

BOE Governor Mark Carney
While all 50 analysts in a Bloomberg News survey predict the BOE will keep its key rate at a record-low 0.5 percent today, they are divided over how Mark Carney, governor of the Bank of England, will react to the improving employment picture. Photographer: Chris Ratcliffe/Bloomberg

Bank of England Governor Mark Carney’s forward-guidance policy may be buckling under the strength of the U.K. economy.

The fastest growth since 2010 means unemployment could fall to the 7 percent threshold as soon as June, forcing officials to at least consider raising rates sooner than Carney might like, according to Goldman Sachs Group Inc. That’s earlier than the Monetary Policy Committee forecasts. The MPC kept its key rate at a record-low 0.5 percent today and its bond-purchase program at 375 billion pounds ($617 billion), as forecast by all economists surveyed by Bloomberg News.

At stake is the strategy that Carney introduced in August, one month after joining the London-based BOE from the Bank of Canada. Modifying guidance, such as changing the unemployment threshold at which the MPC has said it will review policy, risks undermining confidence in a program intended to foster Britain’s recovery by keeping borrowing costs low.

“Falling unemployment and the strengthening of the economic recovery has stoked speculation that the MPC will raise interest rates in the not-too-distant future,” said Samuel Tombs, an economist at Capital Economics Ltd. “The committee may alter its guidance soon in another attempt to convince markets that rates are not going to rise for some time.”

Since the BOE’s last decision on Dec. 5, investors have added to bets for higher borrowing costs, pushing the yield on the short-sterling futures contract expiring in March next year up 19 basis points to 1.06 percent.

Sterling rose 11 percent against the dollar in the past six months and was up 0.2 percent at $1.6473 at 1:57 p.m. in London. It strengthened 0.3 percent to 82.34 pence per euro.


All 50 economists in a Bloomberg survey predicted that the BOE would keep its key rate unchanged today, while all 38 in a separate poll forecast there would be no change to the asset-purchase total. Where they split was on Carney’s response to the improving labor-market picture.

Before today’s announcement, Jefferies International Ltd. forecast the BOE will lower the guidance threshold to 6.5 percent in February, when policy makers will have new growth projections. JPMorgan Chase & Co. said Carney won’t revise guidance at all. The BOE will publish the minutes of this month’s meeting on Jan. 22.

ECB Strengthening

The European Central Bank’s Governing Council kept its benchmark rate at a record-low 0.25 percent after meeting in Frankfurt today, as predicted by all 51 economists in a survey. President Mario Draghi, who in July pledged to keep rates low for an “extended period,” said today officials have strengthened this promise.

“We used firmer words for indicating the strength of our forward guidance,” Draghi told reporters in Frankfurt. ‘It reiterates our decisiveness to act if needed.’’

Federal Reserve policy makers hold their next meeting on Jan. 28-29 after announcing last month they will taper the pace of their monthly bond buying. Minutes of the Fed’s December meeting published yesterday showed officials rejected the idea of lowering their unemployment threshold from 6.5 percent, opting instead to “provide qualitative guidance regarding the committee’s likely behavior after a threshold was crossed.”

BOE Guidance

The BOE introduced guidance in August, saying it wouldn’t consider raising rates until unemployment fell to 7 percent, a move intended to give businesses and households confidence about the outlook for policy. At the time, the MPC forecast the threshold wouldn’t be reached until late 2016. It revised the projections in November and said the rate may be hit as soon as the end of this year.

Unemployment fell to 7.4 percent in the three months through October, the lowest since April 2009, according to the statistics office. Figures based on a restricted survey sample show the rate was 7 percent in October.

U.K. economic growth may have accelerated to 1 percent last quarter from 0.8 percent in the three months through September, Markit Economics estimated this month, based on its services, factory and construction indexes. Economists in a Bloomberg survey forecast expansion of 2.5 percent this year.

Against that, waning inflation may give the central bank scope to delay tightening. Price growth slowed in November to 2.1 percent, the least in four years and close to the BOE’s 2 percent target.

The threshold “may prove something of a red herring,” said Neil Williams, the London-based chief economist at Hermes Fund Managers Ltd. “Markets may have taken Carney’s guidance too much to the letter, rather than just the spirit.”

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