Carney in Middle of Global Policy as World Awaits Fed Move

World Bank Group & International Monetary Fund Annual Fall Meetings

Bank of England Governor Mark Carney.

Photographer: Guillermo Gutierrez/Bloomberg
  • BOE policy meeting falls between ECB's and Federal Reserve's
  • U.K. rate to stay at record-low 0.5 percent on Dec. 10

Mark Carney is stuck in the middle of the global monetary-policy game.

With the Bank of England keeping interest rates at a record low for now, the Governor is set squarely between European Central Bank President Mario Draghi, who’s topping up euro-area stimulus, and Federal Reserve Chair Janet Yellen, who may be just a week away from a rate hike. The Monetary Policy Committee will announce its latest decision at noon on Thursday in London.

Economists predict the panel will hold the middle ground well into next year, preferring to wait to see how the outlook evolves before pulling the trigger on the first rate increase in more than eight years. In the meantime, international policy settings are pushing and pulling on the pound, which has appreciated this year, helping keep U.K. inflation around zero.

“The U.K. is sandwiched between the weaker euro-zone and the much stronger U.S. economy,” said Azad Zangana, an economist at Schroders Investment Management. “It is a fine balancing act for the Bank of England. We’re looking for them to raise rates in August of next year.”

Vote Split

Officials will vote 8-1 to keep the key rate at 0.5 percent, according to a Bloomberg survey of economists, with Ian McCafferty maintaining his push for an increase. Minutes of the gathering, released at the same time, will outline how their thinking has changed since November, when they weighed a resilient domestic economy against the weaker global outlook and signaled low rates are needed to ward off risks.

The timing of the meeting means that while BOE officials will have digested the ECB’s latest assessment of the euro-region economy and fresh stimulus measures, they’ll still be waiting for the outcome of the Fed’s meeting on Dec. 16. Yellen has said that the first increase in the main U.S. rate since 2006 is a “live option” this month. Carney is due to speak to lawmakers in Brussels at 3 p.m. local time on Monday, in his capacity as First Vice Chair of the European Systemic Risk Board.

As Draghi and Yellen diverge, the forces mean the pound will “keep playing piggy in the middle,” according to Victoria Redwood, an economist at Capital Economics in London. She’s referring to a game where two people toss a ball between each other over the head of a third person, who has to jump up and catch it.

“No change looks likely in the U.K. in the near future,” Redwood said. “Sterling is therefore likely to be caught in the crossfire.”

Currency Moves

The pound was trading at 71.8 pence per euro, up 0.3 percent from Friday, and was at $1.5067 as of 11:54 a.m. in London. While a trade-weighted measure has jumped 5.6 percent in the past year, it has fallen around 1 percent since the BOE’s last meeting on Nov. 5.

Assessing the impact of the currency is a focus for policy makers seeking to predict where inflation is headed. In November, the MPC emphasized downside risks and said the pound’s strength continued to exert pressure. Officials predicted consumer-price growth would remain below 1 percent -- less than half their 2 percent target -- until the second half of 2016, underscoring the case for keeping rates low.

Toned Down

The MPC will also update its assessment of the external environment, since the international outlook hasn’t evolved as negatively as it predicted. The BOE’s November view that emerging markets have “slowed markedly” contrasts with the Fed’s toned-down language on the region.

On the domestic side, recent U.K. reports have been mixed, with manufacturing and construction growth cooling in November and services accelerating. While those surveys indicate growth of 0.6 percent in the fourth quarter, trade and industrial production statistics released this week will help sharpen the picture.

“The worst fears about the global slowdown have not materialized,” said Alan Clarke, an economist at Scotiabank. “Domestic data also look a little bit better. There’s no compelling rush to change course. I expect them to keep all options open.”

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