Bank of England Governor Mark Carney and his colleagues are debating how they can reflect the strength of the U.K. economy in their forecasts without suggesting that interest rates are about to go up.
Officials are compiling a new quarterly economic outlook, due to be published next week, and reviewing how to guide expectations after unemployment plunged to within a whisker of the threshold for considering an interest-rate increase. Carney says he’s in no rush to end emergency stimulus, and the Monetary Policy Committee kept the benchmark rate at 0.5 percent today.
Carney faces the biggest test of his credibility since unveiling the flagship policy six months ago as he seeks to convince households and businesses that the economy has enough spare capacity to extend almost five years of record-low borrowing costs. Officials stress that Britain faces risks from a euro-area economy struggling to gain traction and from emerging-market turmoil.
“The strength of the growth story coupled with the robustness of the labor market means that the BOE are likely fighting a losing battle in convincing markets that rate hikes are a distant prospect,” said James Knightley, an economist at ING Bank NV in London. “We are currently forecasting a February 2015 move, but the clear threat is that the BOE may be forced into action in the fourth quarter 2014.”
All 57 economists in a Bloomberg survey predicted that the MPC would keep its key rate unchanged today. The MPC also maintained its bond-purchase program at 375 billion pounds ($612 billion), as forecast by all 44 economists in a separate poll. Minutes of the decision showing how officials voted will be published Feb. 19.
The U.K. economy grew at its strongest pace since 2007 last year, pushing the jobless rate down to 7.1 percent in the three months through November. That’s just above the 7 percent level officials identified as the point for thinking about raising rates. When the policy was announced in August, unemployment stood at 7.8 percent and was not projected by the BOE to hit the threshold until 2016.
The shift has forced Carney to emphasize that 7 percent unemployment is a threshold and not a trigger. Last week, he said the economy has “some way to run” before officials move away from emergency stimulus.
While his argument has been made easier by moderating inflation, Citigroup Inc. and Nomura International Plc are forecasting the bank will raise the benchmark rate -- on hold since March 2009 -- as early as this year. The pound has risen 3.5 percent over the past three months, the most among 10 developed-nation currencies tracked by Bloomberg.
Sterling fell 0.1 percent against the dollar and was trading at $1.6296 as of 12:53 p.m. London time. The benchmark 10-year gilt yield rose 3 basis points to 2.72 percent.
“It is undoubtedly true that the run of strong data in the U.K. over recent weeks, particularly GDP and unemployment, have led many observers to bring forward their expectations for the timing of BOE tightening,” said RBC Capital Markets Chief European Economist James Ashley. “But none is so aggressive as to expect anything just yet.”
The European Central Bank, which pledged in July to keep rates low for an “extended period,” held its main refinancing rate at 0.25 percent today, a decision predicted by 62 of 66 economists in a Bloomberg survey. The Governing Council also maintained the deposit rate at zero and the marginal lending rate at 0.75 percent. ECB President Mario Draghi will hold a press conference at 2:30 p.m. Frankfurt time.
The U.K. economy grew 0.7 percent in the fourth quarter and surveys of manufacturing, services and construction show continued expansion at the start of the year. Economists in a Bloomberg survey forecast growth of 2.6 percent this year.
Against that, waning inflation may give the central bank scope to delay tightening, with consumer-price growth slowing to the BOE’s 2 percent target for the first time in more than four years in December. GDP is also 1.3 percent below its pre-recession peak in early 2008. Carney has cited weakness in the euro-area economy, high debt levels and the threat to exports from the pound’s strength as reasons to keep policy loose.
On Feb. 12, the Bank of England publishes its quarterly Inflation Report, giving Carney an opportunity to explain what the next phase of guidance might look like. Economists say options include lowering the threshold or using Federal Reserve-style language to indicate that rates can remain on hold well after unemployment drops below 7 percent.
“The difficulty is, because they have made quite a large forecast error, it requires a bit of an about-face in terms of what they may have been planning,” said Rob Wood, an economist at Berenberg Bank in London and a former BOE official.