Carney’s Time in Canada Points to Caution on BOE Rates

BOE Governor Mark Carney
Mark Carney, governor of the Bank of England, speaks during the annual Bankers and Merchants dinner at Mansion House in London, U.K., on Thursday, June 12, 2014. Photographer: Simon Dawson/Bloomberg

July 21 (Bloomberg) -- Mark Carney may have been recalling his time at the Canadian central bank when he cooled talk last month of an early Bank of England interest-rate increase.

The Bank of Canada raised its key interest rate by 75 basis points from a record-low 0.25 percent in three moves between June and September 2010. Futures data compiled by RBC Capital Markets show investors were betting on more increases.

“The historical experience there suggests the market consistently priced in too much,” said Sam Hill, senior U.K. economist at RBC in London. “If you were looking for a potential read across it’s worth bearing in mind that was the experience in Canada.”

Carney said in a June 12 speech that investors were underpricing the risk of a U.K. rate increase this year, prompting institutions from Deutsche Bank AG to Credit Suisse Group AG to bring forward forecasts for the timing of the first move. Less than two weeks later, he softened his rhetoric in comments to a parliamentary panel, throwing the market into confusion and leading opposition lawmaker Pat McFadden to accuse him of behaving like an “unreliable boyfriend.”

Sonia forwards are pricing in two quarter-point increases by June, with the first occurring by February. The median estimate of economists in a Bloomberg survey is for the key rate, currently at a record-low 0.5 percent, to be at 1.5 percent by the end of next year.

The day after Carney gave his annual Mansion House speech, the two-year gilt yield jumped 13 basis points to 0.86 percent and rose as high as 0.94 percent. It has since eased to 0.83 percent, as of 5:08 p.m. London time.

Debt Crisis

In 2010, the Bank of Canada became the first major central bank to raise interest rates since the financial crisis, saying “robust” domestic growth threatened to stoke inflationary pressures.

According to Hill, when the key reached 1 percent futures traders were pricing in increases that would have taken the benchmark to about 1.8 percent within a year.

They never materialized. As Carney began to tighten policy, the debt crisis in the euro region unfolded. In his final 18 months as governor, Greece restructured its debt, Spain requested support for its banks and Cyprus received a bailout.

A one-page statement accompanying the first rate increase mentioned Europe and its debt crisis four times and said further increases would be “weighed carefully.”

Too Specific

BOE officials have also emphasized that while the economy is strengthening, rate increases will not be as steep as in the past. Decisions will continue to be “data-driven” and policy makers are only providing guidance “around the medium-term path of interest rates, not the timing of the first move and on asset prices,” Carney told lawmakers on July 15. He is set to speak in Scotland on Wednesday.

“He seemed to be getting quite specific as regards market pricing,” said Jason Simpson, U.K. rate strategist at Societe Generale SA in London. “Maybe he felt that was too specific and seems to have been pulling back a little bit by talking about the data. He’s leaving himself a decent amount of wriggle room.”

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To contact the editors responsible for this story: Paul Dobson at Andrew Atkinson, Todd White