BOE Seen Tweaking Guidance as Carney Embraces Jobs Boon
Bank of England Governor Mark Carney will change forward guidance next month, economists said as they forecast that unemployment will hit a key level far earlier than previously anticipated.
More than 60 percent of respondents to Bloomberg’s monthly survey said Carney will refine the flagship policy when the BOE publishes its quarterly Inflation (UKRPCJYR) Report on Feb. 12. Almost one third of economists said the jobless rate will fall to 7 percent in the first half of the year, a juncture that will require Carney to consider raising borrowing costs.
A rethink of guidance just six months since it was introduced is being forced on the Monetary Policy Committee as the economy strengthens and unemployment drops. While the governor has welcomed the recovery, he now faces the challenge of presenting a possible policy alteration without eroding the credibility of his plan to keep interest rates at a record low.
“It’s pretty clear that unemployment is declining at a more rapid pace than the BOE had been expecting,” said Philip Shaw, an economist at Investec Securities in London. “The MPC will have to make a call on what to do with guidance, and it needs to do that as soon as possible.”
In the survey, 68 percent of economists said the threshold will be reached in 2014, including 55 percent who forecast it by the end of the third quarter and 29 percent in the first half of the year. That’s a revision from last month, when no economist saw 7 percent until at least the second half. The BOE previously forecast that the threshold may only be reached at the end of 2014 and will publish new projections in February.
Of 33 economists who responded to the question on guidance, 20 said the BOE will change the policy next month. Of those, nine expect the central bank to lower the unemployment threshold to 6.5 percent, with the same number forecasting a tweak to the BOE’s language to mimic that of the Federal Reserve.
Speaking in London today, MPC member Ben Broadbent said that 7 percent isn’t a trigger for an automatic rate increase.
It’s a “staging post,” he said. “When we get there, we’ll see what we’ll do. What we do is in the context of an unchanged objective which is the inflation target. It’s not for me anticipate what the MPC as a whole will do.”
The Fed made refinements to its own guidance in December and pledged not to raise the main interest rate until “well past the time” joblessness falls below its threshold level of 6.5 percent. The European Central Bank has also modified its language, with President Mario Draghi saying last week he’s using “firmer words” to stress a commitment to low rates.
The improving outlook for the labor market comes as economists raise their forecasts for the economy. U.K. gross domestic product is seen expanding 2.5 percent this year after a 1.8 percent increase in 2013. Economists forecast 2.4 percent last month.
U.K. retail sales surged in December, the Office for National Statistics said today in London, adding to evidence that growth is gathering pace. Sales including fuel jumped 2.6 percent from November. That’s the strongest December since records began in 1996.
Inflation will cool more than previously forecast in 2014, with economists now seeing average price growth of 2.1 percent. They projected 2.2 percent in December. Low inflation will give Carney room to keep interest rates on hold even as the economy strengthens. It fell to 2 percent in December, hitting the BOE’s goal for the first time in more than four years.
“The MPC will be reassured that it is not running any immediate risks with inflation by taking time to normalize monetary policy,” Goldman Sachs Group Inc. economists including Huw Pill and Kevin Daly in London said in a report yesterday.
They said guidance may be strengthened by “implicitly or explicitly” attaching more weight to a recovery in labor incomes. Waiting for that would make household finances “more robust to a rise in bank rate when it comes,” they said.
To push his low-rate stance, Carney can also point to data showing weakness in industrial production and construction in November, indicating the economy may have struggled to build momentum in the fourth quarter. In the survey of economists, 66 percent said the U.K. economy has not achieved what Carney has termed “escape velocity,” up from 60 percent last month.
As well as putting pressure on guidance, the improving economy is also helping to fuel housing demand, prompting Carney to cut incentives for mortgage lending in a BOE credit-boosting program.
While a majority of economists in the Bloomberg survey still say housing is at risk from overheating, the outlook is shifting, down to 58 percent from 67 percent.
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