Carney Seen Preserving Bets on No U.K. Rate Increase for a Year

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Mark Carney
Bank Of England Governor Mark Carney. Photographer: Chris Ratcliffe/Bloomberg

Mark Carney may well reflect on the vagaries of forecasting as he prepares to deliver his annual Mansion House speech to financiers in London on Wednesday.

A year after the Bank of England governor hinted that U.K. interest rates could increase within months, money markets are projecting officials will maintain the benchmark cost of borrowing at a record low until the summer of 2016.

At the Mansion House dinner last year, Carney told households and businesses to prepare for a rate increase “sooner than markets currently expect,” prompting investors to shift bets on a move to February 2015 from May. Since then, inflation has evaporated and the economy is struggling to rebound from its weakest quarterly performance since 2012.

“This time around I am not all that certain he wants to inject any more volatility into the market,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London.

Investors are only fully pricing a quarter-point rate increase from the current 0.5 percent by July 2016, according to Sonia fixings data provided by ICAP Plc. That’s five months later than projected earlier this year.

Carney’s communication skills have fallen short of the hype that accompanied his July 2013 arrival in the U.K. He had to rethink his forward guidance linking monetary policy to the labor market after unemployment fell faster than forecast, while the need to unwind his Mansion House message even led to him being dubbed an “unreliable boyfriend” by one lawmaker.

Slower Pace

Despite the labor market continuing to strengthen, inflation fell below zero in April for the first time in half a century. Economic growth slowed to 0.3 percent in the first quarter from 0.6 percent in the previous three months and BOE officials estimate spare capacity -- the economy’s room to grow without triggering faster inflation -- will persist for another year.

“Data has suggested that the U.K. has settled into a slower pace of growth,” said Jane Foley, a senior currency strategist at Rabobank International in London. “So any acknowledgment of that by Carney could undermine sterling.”

The pound has appreciated more than 9 percent versus the euro since Carney’s speech last June. It was at 73.02 pence per euro as of 2:35 p.m. in London on Wednesday, having reached 70.14 pence in March, the strongest level since November 2007. Sterling was at $1.5522, down from $1.6929 on June 12, 2014.

Oil Price

Carney issued his warning on interest rates just days before oil began a retreat that had wiped 60 percent off its price by the start of 2015. U.K. consumer prices fell an annual 0.1 percent in April, the first negative rate since 1960. Officials see inflation returning to their 2 target in the second quarter of 2017.

U.K. government bonds advanced in the past 12 months, with the benchmark 10-year yield falling about 60 basis points, or 0.6 percentage point, to 2.14 percent on Wednesday. It touched a record-low 1.33 percent in January.

With the Greek crisis overshadowing the European economy, the Monetary Policy Committee has united in recent months over the need to keep the U.K. benchmark at 0.5 percent, its level since March 2009, after a two-person minority argued for an increase at the end of last year.

“The BOE has moved the goalposts for a rate hike repeatedly over the last 21 months,” Daniel Vernazza, a London-based economist at UniCredit SpA, wrote in a report to clients last week.

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