Carney Starts Early Forward Guidance as BOE Holds Bond Purchases
Mark Carney signaled that the Bank of England will keep interest rates at a record low for longer than investors had expected as he used his first meeting as governor to give more insight into future policy.
The “implied rise in the expected future path of bank rate was not warranted by the recent developments in the domestic economy,” the BOE said in a statement in London after it left its benchmark interest rate and bond-purchase program unchanged. The pound fell the most in almost five months against the dollar and investors pushed back bets on the timing of a rate increase.
Carney is the first foreigner to run the 319-year-old institution and today’s move pushes the BOE toward the policy guidance tool that he favors. It also signals that central bank will keep monetary policy accommodative as higher bond yields and volatility in markets threaten the U.K.’s economic recovery.
“They’ve already started guidance, in a less explicit way, with this statement,” said David Tinsley, economist at BNP Paribas in London and a former central bank official. “It leaves the door open to more asset purchases down the track.”
The pound dropped 1.2 percent to $1.5099 as of 12:41 p.m. London time, the lowest since May 31.
Short-sterling futures contracts advanced, signalling traders are reducing bets for higher interest rates. The implied yield on the contract expiring in September 2014 fell 11 basis points, or 0.11 percentage point, to 0.73 percent as of 12:41 p.m. London time. Short-sterling futures are used by analysts to gauge the future trajectory of borrowing costs between banks.
The BOE statement follows a rout in global bond markets sparked by Federal Reserve Chairman Ben S. Bernanke’s comments that the central bank may begin to taper its monthly stimulus. The 10-year U.K. government bond yield rose to 2.59 percent on June 24, the highest since 2011. Gilts advanced today, pushing the yield down 4 basis points to 2.35 percent. Two-year yields dropped 6 basis points to 0.35 percent.
“Market interest rates have risen sharply internationally and asset prices have been volatile,” the BOE said. While the economic outlook is “broadly similar” to forecasts published in May, “significant upward movement in market interest rates would, however, weigh on that outlook.”
The comments on the prospects for interest rates come as the MPC reviews potential new measures to revive economic growth. Since Carney’s appointment, Chancellor of the Exchequer George Osborne affirmed the BOE’s right to use unconventional tools such as forward guidance and asked it to assess how intermediate thresholds would work. The MPC is due to report back in August.
“This is a prelude to very likely the announcement of a framework for guidance next month,” Bill O’Neill, who helps oversee about $630 billion at UBS Global Asset Management, said in an interview with Bloomberg Television’s Guy Johnson. “It’s trying to engage markets in terms of setting opinion. It’s a communication strategy rather than an actual form of guidance.”
All 44 economists in a Bloomberg News survey had forecast that the BOE would keep its target for bond purchases at 375 billion pounds ($566 billion) today. All 53 economists in a separate poll predicted no change to the key rate, which has been at a record low of 0.5 percent since March 2009. The minutes of today’s meeting will be published on July 17.
The European Central Bank kept its main refinancing rate at 0.5 percent today after reducing it by a quarter point in May. The decision was predicted by 61 of 62 economists in a Bloomberg News survey. Draghi will hold a press conference at 2:30 p.m. in Frankfurt.
Markit Economics said this week that U.K. services and manufacturing growth accelerated to their fastest in more than two years in June, while construction expanded the most in more than a year. Markit said the reports point to second-quarter economic growth of at least 0.5 percent.
“In the U.K., there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time,” the BOE said today.
The publication of the statement is itself a mark of Carney’s difference from his predecessor, Mervyn King. The last time the MPC issued a statement without an accompanying change in policy was in February this year, when officials said they’d reinvest the first gilts to mature since asset purchases started in March 2009. It also released a statement in February 2010, when it voted not to expand QE for the first time since its inception.
“The fact that there was a statement actually does indicate that Carney is trying to change things from the very outset,” Charles Goodhart, a founding MPC member, said on Bloomberg Television. “It’s the perception of where interest rates are going which Carney will be most interested to try and shape.”
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