Mark Carney toned down his rhetoric on the timing of a Bank of England interest-rate increase as lawmakers criticized him for a lack of clarity on the outlook for policy.
“Developments on the wage front suggest to me that there has been more spare capacity in the labor market than we had thought,” Carney told lawmakers on Parliament’s Treasury Committee today. The exact timing of any increase in the BOE’s key rate “will be driven by the data,” he said.
The pound fell after the comments, which came less than two weeks after Carney indicated the BOE’s benchmark might rise from a record low earlier than investors anticipated. One lawmaker said the governor was acting like an “unreliable boyfriend” and leaving businesses and consumers in an uncertain position.
“Carney disappointed some of the hawkish expectations today,” said Philip Rush, an economist at Nomura International Plc in London. “It’s less a case of saying when they will hike and more about saying there’s more uncertainty about the timing than the market had been giving the BOE credit for.”
Carney’s comments on June 12 prompted traders to bring forward bets for a rate increase to February 2015 from May. He said today that he “absolutely” intended that reaction because officials wanted markets to reflect more the progression in the economy.
“Expectations for an interest-rate increase for the latter half of this year were relatively low juxtaposed with a run of quite strong data,” he said. “What we’re trying to do, and I’ll make it absolutely clear, is that we’d like to see the market adjust to the data just as our opinions are updating. We were surprised it had not.”
Carney is approaching his first anniversary as governor of the BOE, a period that began with the introduction of forward guidance as a policy tool. Treasury Committee member Pat McFadden highlighted that in the past year, Carney’s guidance has moved from indicating the first rate increase in 2016 to comments that investor bets for 2015 might even be an “underestimation.”
“It strikes me that the bank’s behaving a bit like a sort of unreliable boyfriend,” he said. “One day hot, one day cold and the people on the other side of the message are left not really knowing where they stand.”
The BOE has held its benchmark rate at a record-low 0.5 percent since March 2009.
The pound fell from close to the highest in more than five years versus the dollar today. It was 0.2 percent lower at $1.6998 as of 12:20 p.m. London time, after reaching $1.7063 on June 19, the strongest level since October 2008.
Carney gave “a more balanced assessment than many had expected but clearly the risks of an early rate hike remain,” said Sam Hill, an economist at RBC Capital Markets in London. “Whether it comes to fruition or not is still data dependent.”
The governor said the Monetary Policy Committee was giving guidance “to focus attention on what really matters,” which is where the benchmark rate will be in the medium term. He said this is more important than the timing of the first increase.
“As the economy progresses, the time to normalize interest rates is edging closer,” he said. “What’s most relevant is our view that those adjustments will be to a level of interest rates, through a gradual process, that’s likely to be materially lower than historic averages.”
Deputy Governor Charles Bean, who also appeared before the lawmakers, said the nine members of the MPC “were all struck by the high degree of certainty” that markets had about the timing of any increase. Low levels of volatility suggest investors “underestimate the uncertainty of the environment they, and we, are operating in,” he said.
Carney said recent wage data suggest that policy makers can wait before lifting borrowing costs.
“The best collective judgment of the MPC, which I share, is that there’s additional spare capacity concentrated in the labor market that can be absorbed further before we begin to normalize interest rates,” he said.