Mark Carney has come through his first public argument on interest rates with enough scope to contain dissent for now.
While policy makers Martin Weale and Ian McCafferty voted for an increase this month, the gulf between their thinking and that of the governor’s seven-strong majority suggests his view will hold sway, according to economists at banks including Goldman Sachs Group Inc. and UniCredit SpA.
Investors share that outlook, with expectations for the first rate increase staying stuck in May even after the revelation of the first split in more than three years. Even though Carney has given some mixed signals on the potential timing of tightening, his warnings about risks to the recovery signal an entrenched position in his camp.
“The two are on their own, and it’s now Carney who holds the key,” said Daniel Vernazza, an economist at UniCredit in London. “There are too many on the committee who are aligned to him for him to be outvoted.”
Minutes of the bank’s Aug. 6-7 meeting published yesterday showed Weale and McCafferty, both external members of the Monetary Policy Committee, voted to raise the key rate by 25 basis points from a record-low 0.5 percent. They said the drop in unemployment and signs of a tighter labor market signaled wages are set to pick up, and so “economic circumstances were sufficient to justify an immediate rise in bank rate.”
Investors were more impressed with Carney’s comments at a press conference last week, when he said geopolitical risks and headwinds from Europe meant “now is not the time” for higher borrowing costs. He was presenting new economic projections that included higher growth forecasts, lower expectations for wage growth and a view that inflation would stay below the BOE’s 2 percent goal until 2017.
Traders pushed back bets on the first rate increase from February after Carney’s comments. Forward contracts based on the sterling overnight interbank average show they have priced in a 25 basis-point increase in May. The minutes also haven’t snapped the pound’s decline against the dollar. Sterling fell a third day, slipping 0.1 percent to $1.6581 at 11:10 a.m. in London.
Carney’s view was echoed in the view of the seven-strong majority. They said there was “insufficient evidence of inflationary pressures to justify an immediate increase” and “there would be merit in waiting.”
The split arose on a panel that’s changed substantially since Carney joined the bank in July 2013. Deputy Governors Nemat Shafik and Jon Cunliffe, and Chief Economist Andrew Haldane, all internal MPC members, were appointed to those roles after that, while Kristin Forbes was named an external member. Ben Broadbent moved from an external position to become deputy for monetary policy this year, while David Miles, Weale and McCafferty were holdovers from before Carney’s arrival.
“The views of Weale and McCafferty don’t bear a significant resemblance to those of the majority on the committee, particularly the bank staff and David Miles,” said Chris Scicluna, an economist at Daiwa Capital Markets Europe in London and a former Treasury official. “They have a different reaction function. That’s probably even more so given the recent changes to staffing, and there’s probably even greater commonality of view among the internal members.”
Kevin Daly at Goldman Sachs says the split may not presage an impending policy change because “minority votes are not particularly informative for future changes in bank rate.” Phil Lachowycz at Fathom echoed that, saying dissenting votes “have signaled that a policy change is imminent no more than half of the time.”
Sam Hill at RBC Capital Markets said the 7-2 split “is where it could sit for a while,” though developments in output, wage and inflation data could spark a change.
The BOE cut the benchmark rate to 0.5 percent in March 2009 and kept the emergency policy settings even as the recovery gained enough traction to put the U.K. on track to be the fastest-growing Group of Seven economy this year.
Carney has placed wages at the focus of policy making as he seeks to cement the recovery. In an newspaper interview published on Aug. 17, he said rates could rise before wages start growing “sustainably.”
Earnings fell in the second quarter from a year earlier and the BOE cut its projection for 2014 wage increases. Against that, the central bank raised its projection for economic growth to 3.5 percent, while surveys point to a pickup in wage inflation. Even Carney has said that economic momentum is “increasingly assured.”
“Over the next few months it’s going to become more finely balanced,” said Dario Perkins, an economist at Lombard Street and a former Treasury official. “If we get further decent data for the U.K. we will start to see some movement among those members, and that firm majority we have now will start to splinter.”