Carney Roils U.K. Markets With Rate Comment After Inflation Data

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Investors in U.K. markets were still digesting news of evaporating inflation when Mark Carney threw them another curveball.

In testimony to U.K. lawmakers on Tuesday, the Bank of England governor said the time for a rate increase is moving closer, sending the pound to the highest level in more than a week against the dollar, and hurting government bonds. The moves contrast to those earlier in the day, when a report showing U.K. consumer prices stagnated in the 12 months through June offered ammunition to those BOE officials who favor keeping interest rates at a record-low 0.5 percent for longer.

“The tone of his comments is strong,” said Neil Jones, the head of hedge-fund sales at Mizuho Bank Ltd. in London. “This was certainly not factored into the market. It was very much a morning of two halves.”

The pound added 0.6 percent to $1.5576 at 4:12 p.m. London time, and touched $1.5633, the highest level since July 3. Sterling strengthened 0.5 percent 70.67 pence per euro.

Investors don’t see rates rising until May 2016 at the earliest, according to forward contracts based on the sterling overnight index average, or Sonia.

“The point at which interest rates may begin to rise is moving closer given the performance of the economy,” Carney said. This is “counterbalanced somewhat by disinflation.”

Communication Skills

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 2014 Mansion House message that U.K. interest rates could increase within months led to him being dubbed an “unreliable boyfriend” by one lawmaker.

Benchmark 10-year gilt yields rose one basis point, or 0.01 percentage point, to 2.13 percent and touched 2.17 percent, the highest since July 2. The 5 percent security due in March 2025 dropped 0.1, or 1 pound per 1,000-pound face amount, to 124.925.

The stagnation in consumer prices follows a 0.1 percent increase in May and was in line with the median estimate in a Bloomberg survey of economists. A report on Wednesday is forecast by economists to show U.K. wage growth accelerated to an annual 3 percent in the three months through May, from 2.7 percent previously.

The Debt Management Office plans to auction 1.5 billion pounds of inflation-linked gilts due in March 2026 on Wednesday.

Minutes of the BOE’s Monetary Policy Committee’s July meeting will be released next week.

Carney “is sounding a little more positive on the outlook than he has for a while,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London. “The U.K. data has been robust over the past few months. Now that wages are finally picking up, it makes sense that the more dovish members of the MPC, including the Governor, will start to sound cautiously more willing to consider a rate hike.”

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