Carney Steals Show as BOE Seen Refraining From Stimulus

Bank of England officials will likely refrain from adding stimulus to aid the economy today in a decision that will be overshadowed by the bank’s next governor.

Mark Carney began testifying to lawmakers at 10:08 a.m. in London in a session that may last beyond the Monetary Policy Committee’s decision at noon. The BOE panel led by the current governor, Mervyn King, will maintain its target for bond purchases at 375 billion pounds ($587 billion), according to all 43 economists in a Bloomberg News survey.

While the MPC might announce what it plans to do with proceeds of 6.1 billion pounds of gilts maturing early next month, economists including Peter Dixon at Commerzbank AG say attention will be most focused on Carney, who replaces King in July. The Bank of Canada Governor has triggered a debate on the Bank of England’s remit and how far central bankers can go to aid recoveries with comments on policy guidance and new targets.

“It’s all eyes on Carney, and from a market sensitivity perspective, it’s critical,” London-based Dixon said in an interview. “The MPC is in a bit of a limbo position since they can’t do more QE before he comes in and their view is it doesn’t really work anyway. It’s a good position in a way because it gives them cover not to have to do anything.”

The pound was little changed against the dollar, trading at $1.5672 as of 10:02 a.m. in London. The yield on the 10-year gilt was unchanged at 2.096 percent.

Cold Snap

The Bank of England will also keep its benchmark interest rate at a record-low 0.5 percent, according to a separate survey of economists. In Frankfurt, the European Central Bank will maintain its key rate at 0.75 percent, also a record low, another poll shows.

While heavy snowfalls threatened to push the British economy into an unprecedented triple-dip recession, surveys in January suggest Britain might be spared as both manufacturing and services showed expansion. Policy makers will have considered such mixed signals as well as quarterly forecasts produced for this month’s decision.

ARM Holdings Plc, whose chip designs power Apple Inc.’s iPhone, reported fourth-quarter sales this week exceeding analyst forecasts as demand surged. Still, “the global macro-economic environment continues to be characterized by uncertainty and the prospect of low growth,” the company said.

Gilt Decision

Bank of England officials will also have industrial production data to consider. U.K. manufacturing output rose 1.6 percent in December, its biggest monthly increase since July last year, boosted by machinery equipment and chemical products, the Office for National Statistics said today. That’s twice as much as the median forecast of 28 economists in a Bloomberg News survey.

Policy makers must also decide before March 7 what to do with maturing gilts in their Asset Purchase Facility for the first time since the BOE began buying bonds in 2009. Citigroup Inc. is among banks forecasting that they will reinvest the proceeds of quantitative easing and buy more government debt, as not replacing them would equate to policy tightening. Still, Citigroup said this is “not a done deal.”

For Philip Shaw at Investec Securities, the issue is that buying gilts when the MPC has signaled policy is unchanged “might send a confusing signal.” The BOE could also take into account the transfer of gilt income earned in the APF to the Treasury in a move King has said equates to a monetary easing.

Rolling Over

“The MPC could claim that not rolling over its gilt holdings offsets -- or is on a similar scale to -- these flows, at least for a few years,” Shaw said. “Allowing the gilts to roll off would give markets a clearer roadmap as to how QE could eventually be unwound.”

As the MPC deliberates, Carney will be questioned on his economic outlook, his salary, and on monetary policy by Parliament’s 13-member cross-party Treasury Committee.

“People are probably going to be more interested in what Carney has got to say at this stage because there aren’t high expectations for any action from the MPC,” said Simon Wells, chief U.K. economist at HSBC Holdings Plc in London.

Carney’s comments on how far central banks should go to shore up growth may dominate proceedings. The former Goldman Sachs Group Inc. managing director has discussed the merits of a nominal gross domestic product target and said last month that policy in developed countries isn’t “maxed out.”

The Treasury Committee said Jan. 29 that it will ask Carney whether the existing framework is right and if there “may be a better monetary policy for the U.K.”

BOE Governance

Carney will take over the BOE as it absorbs new regulatory powers over banks. The central bank is also under pressure to beef up governance by its supervisory board and change a culture where King has been criticized for dominating thinking.

Andrea Leadsom, a Treasury Committee member from the ruling Conservative party, said governance will be among the topics she expects Carney to address.

“QE is most likely going to be unwound under his watch, so what does he think will happen, what will be the effects on inflation?” she said in an interview. “There is also a question of governance. There isn’t a real challenge culture at the moment at the BOE. It will be interesting to see what sort of person he is.”

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