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Carney Wins Economist Backing for Keeping Record-Low Rate

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Bank of England Governor Mark Carney
As Bank of England Governor Mark Carney prepares to publish new forecasts in two days and update investors on his views, the level of slack remains a pivotal issue. Photographer: Simon Dawson/Bloomberg

Aug. 11 (Bloomberg) -- Mark Carney’s justification for keeping the Bank of England’s benchmark interest rate at a record low has the backing of economists, according to a Bloomberg survey.

Sixty-seven percent of 33 respondents said there’s still enough slack in the economy to justify holding the key rate at 0.5 percent, where it’s been since March 2009. The BOE has put spare capacity at about 1 percent to 1.5 percent of gross domestic product.

As Carney prepares to publish new forecasts in two days and update investors on his views, the level of slack remains a pivotal issue. Conflicting signals from wage and employment data are dividing the Monetary Policy Committee over how the pickup in the economy will feed through to inflation and when rate increases need to start.

“The degree of labor-market slack evident from wage data suggests that there is no immediate rush to move rates higher,” said Peter Dixon, an economist at Commerzbank AG in London. “Given the uncertainties surrounding estimates of potential GDP growth, there are very wide confidence intervals around” spare capacity estimates.

Eleven of 21 economists in the Bloomberg survey agree with the BOE’s assessment that slack in the economy is within its estimated range. Nine said it’s less than 1 percent, and one said it was more than 1.5 percent of GDP.

Carney said last month that while there may be more labor supply than previously thought, “it’s also true that spare capacity is being used up a bit more rapidly than we had expected.”

Rate Forecasts

Short-sterling futures indicate investors are scaling back expectations of an increase in borrowing costs this year. The implied yield on contracts expiring in December has fallen to 0.78 percent from 0.83 percent a month ago. The yield on the March 2015 contract is at 0.99 percent.

The 10-year gilt yield fell last week to the lowest in a year, as investors sought safe assets amid a deepening crisis in Iraq and the escalating dispute with Russia over Ukraine. It rose 3 basis points to 2.49 percent as of 8:20 a.m. London time. The pound was little changed at $1.6780 against the dollar.

BOE officials have focused on economic slack after their first policy hook under forward guidance, a 7 percent unemployment rate, was achieved faster than forecast. While joblessness has dropped to 6.5 percent, the MPC is trying to understand what it says is a “striking” weakness in wage growth given the strength in hiring.

No Explanation

The BOE may revise its outlook for wage growth when Carney publishes its new projections at a press conference on Aug. 13. While the central bank previously forecast that pay growth would approach 2.5 percent by the end of 2014, subsequent data showed it slowed to 0.7 percent in the three months through May, the least in at least 13 years.

“The message and tone are likely to be ambiguous on whether a first rate rise is most likely to come in the fourth quarter or first quarter,” Morgan Stanley economists including Jonathan Ashworth said in a Aug. 8 report. “We continue to lean towards the first quarter.”

Former MPC member Charles Goodhart said on Bloomberg Television last week that pay is creating a puzzle for policy makers.

“None of us have a good explanation of why wages have remained so depressed,” he said. “One has to confess a degree of uncertainty and ignorance.”

He also said the weakness in the euro area as well as tensions between Ukraine and Russia weighed against BOE tightening. European Central Bank President Mario Draghi said last week the euro-region recovery is “fragile” and that geopolitical risks may damage the economy.

Economic Outlook

In the Bloomberg survey, economists raised their 2014 GDP growth forecast to 3.1 percent from 3 percent last month. Their 2015 projection was unchanged at 2.6 percent, according to the poll, conducted from July 29 to Aug. 6.

They see unemployment averaging 6.5 percent this year and 6.1 percent next. Inflation will be 1.7 percent and 1.9 percent, staying below the BOE’s 2 percent target.

The U.K. economy expanded 0.8 percent in the second quarter, matching the pace of the first three months. Economists forecast 0.7 percent growth this quarter and next.

In a separate survey, 11 of 17 economists said they expect the BOE to leave its current projections for 2014 unchanged this week. A majority also see the 2015 forecast being maintained. In May, the central bank forecast expansion of 3.4 percent this year and 2.9 percent in 2015.

“The MPC’s prior forecast of a second-half slowdown reflected their assumption that pent-up consumer demand would slow as the savings rate levels off, while investment would pick up only gradually,” Michael Saunders, an economist at Citigroup Inc., said in a research note. “In practice, recent business surveys give no sign that a second-half slowdown is likely.”

To contact the reporters on this story: Jennifer Ryan in London at; Andre Tartar in London at

To contact the editors responsible for this story: Craig Stirling at; Joshua Robinson at Fergal O’Brien, Eddie Buckle

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