Carney’s Escape Velocity Seen Out of Reach for U.K.: Economy
Bank of England Governor Mark Carney’s mission to get the U.K. economy to “escape velocity” has not yet succeeded, economists said.
Less than a third of 21 economists said the recovery has reached that level, with 71 percent disagreeing, according to a Bloomberg monthly survey published today. They split on the success of Carney’s forward guidance and whether he made the policy less clear by offering two separate forecasts for unemployment this month.
Britain’s economy grew faster than any other Group of Seven nation in the third quarter, and the Organisation for Economic Cooperation and Development raised its forecasts for the U.K. yesterday. Gross domestic product is about 2.5 percent below its pre-recession peak, and Carney has said he’ll keep interest rates at a record low until the economy is growing sustainably and the recovery is assured.
“We’ve reached escape velocity when the economy no longer needs emergency levels of interest rates, and that’s not the case right now,” said Philip Shaw, chief economist at Investec Securities in London. “Growth doesn’t have enough traction behind it to withstand higher interest rates.”
The Monetary Policy Committee voted unanimously to keep its benchmark rate unchanged this month. In the minutes of the meeting, published today, the MPC said there may be a case for keeping the rate at 0.5 percent even after unemployment falls to the 7 percent threshold set under guidance.
“There were uncertainties over the durability of the recovery,” the MPC said. “With the proviso that medium-term inflation expectations remained sufficiently well anchored, the projections for growth under constant bank rate underlined there could be a case for not raising bank rate immediately when the 7 percent unemployment threshold was reached.”
The pound erased its advance against the dollar after the minutes were released before recovering. It was trading at $1.6153 as of 11 a.m. London time, up 0.2 percent from yesterday.
In the Bloomberg survey, the median estimate of economists is for U.K. GDP to rise 1.4 percent this year and 2.3 percent both next year and 2015. The projections are broadly similar to last month. Inflation is seen averaging 2.6 percent this year, 2.3 percent in 2014 and 2.1 percent the following year, close to the BOE’s 2 percent target.
Carney said in January, before moving from the Bank of Canada, that central banks must secure “escape velocity” for their economies.
Economists in the survey split 50-50 on whether guidance, which he introduced in August a month after joining the BOE, has been successful.
Economists were also divided on whether the BOE’s decision to provide unemployment forecasts based on both market expectations for interest rates and constant rates in its quarterly Inflation Report this month made guidance more or less clear. Under market rates, the BOE sees the 7 percent threshold being hit in the third quarter of 2015. Under constant rates, the level is reached at the end of 2014.
The MPC’s pledge on keeping policy unchanged is subject to so-called knockouts linked to inflation and financial stability. Jane Foley, a senior currency strategist at Rabobank International in London, said she would have preferred if Carney had adopted a similar model to the European Central Bank, where Mario Draghi has pledged to keep rates at current levels or lower for an “extended period.”
“The whole of their forward guidance has been unclear to most people,” Foley said. “The addition of the unemployment criteria and then all of the knockouts too has had the impact of confusing people.”
The OECD said yesterday it expects monetary policy to remain accommodative for most of the next two years and should begin to normalize in the last quarter of 2015. It sees U.K. economic growth accelerating to 2.4 percent in 2014 from 1.4 percent this year.
The OECD also said that Britain needs to boost the supply of property to reduce the risk of a bubble as the housing market strengthens. Fifty-five percent of 22 economists in the Bloomberg survey said the the market is at risk of overheating. Still, just one of 20 economists said they expect housing to trigger the financial stability knockout on guidance.
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