Carney Seen Echoing Fed in Tying BOE Guidance to Data: EconomyFergal O’Brien and Joshua Robinson
Mark Carney will align Bank of England policy closer to the Federal Reserve next month by tying guidance on interest rates to economic developments, according to the Bloomberg monthly survey of economists.
In the poll of 43 analysts taken after the BOE signaled interest rates will stay at a record low longer than investors bet, 23 said the governor will opt to link a pledge on loose policy to economic data. Eighteen said he will use a period of time instead.
Carney’s move on July 4, days after taking over the BOE, pushed the central bank into new territory, and he may go further next month when publishing a review into the use of thresholds for policy. A decision by the Monetary Policy Committee to hook rates to data would echo the Fed, which in December linked policy to inflation forecasts and unemployment.
“The statement following July’s MPC meeting makes it even more likely that a more formal form of forward guidance will be introduced,” said Vicky Redwood, an economist at Capital Economics Ltd. in London. “Our best guess is that the guidance will consist of a commitment to keep interest rates at 0.5 percent until unemployment has fallen below a certain threshold.”
The MPC held its key interest rate at a record-low 0.5 percent on July 4 and said it would leave its target for bond purchases at 375 billion pounds ($566 billion). Minutes of the meeting, showing how the MPC voted, will be released on July 17.
In a statement accompanying the decision, the MPC said investors had priced in higher rates earlier than policy makers anticipated. The remarks pushed the pound and gilt yields lower and signaled Carney’s intention to make his mark.
Carney’s move coincided with a pledge that day by European Central Bank President Mario Draghi to keep interest rates low for an “extended period.” Their unprecedented measures followed Fed Chairman Ben S. Bernanke’s signal that the U.S. may be preparing to start slowing its $85 billion-a-month bond-buying program later this year. That sent bond yields higher.
Concern stimulus in the U.S. may be coming to an end has eased after Bernanke said July 10 that the country needs “highly accommodative” monetary policy for the “foreseeable future.”
British 10-year government bonds advanced for a fifth day today, the longest streak of gains since March. The yield on the 10-year gilt dropped 6 basis points to 2.32 percent as of 1:24 p.m. in London, below its level of July 3, the day before the MPC published its statement. The yield reached a 20-month high of 2.59 percent on June 24.
The governor’s next opportunity to outline policy will be on Aug. 7, when he holds a press conference to present new forecasts. The BOE will also release a review into how setting thresholds for guidance might work.
“I think it’s more likely that we see forward guidance on rates according to some data threshold,” said Danielle Haralambous, an economist at 4Cast Ltd. in London. “The MPC is probably going to be a bit wary of providing a timeframe, given the market response to the Fed’s end-2013 tapering talk.”
Carney has said the current task of monetary policy is to ensure that economies achieve “escape velocity,” while he has also floated the idea of targeting nominal gross domestic product. Still, in the survey, two economists said he won’t opt for any form of forward guidance.
As Bank of Canada governor, Carney said in April 2009 he would keep the key rate at a record low until mid-2010 so long as the inflation outlook didn’t change. The Fed linked its own interest-rate outlook to economic thresholds in December 2012, saying that rates will stay low “at least as long” as the jobless rate exceeds 6.5 percent and if it projects inflation of no more than 2.5 percent one or two years in the future.
Some BOE policy makers have raised concerns about providing insight into the policy path, including the risk of having to renege on commitments or the difficulty in fastening decisions to data that are often revised.
The BOE will “start explicitly telling markets how long it expects to hold rates at current levels,” said Melanie Bowler, an economist at Moody’s Economy.com in London. “Yet what thresholds the BOE would use is a question. Making policy contingent on the unemployment rate, as the U.S. Federal Reserve has done, would not work, since Britain’s unemployment rate has actually declined despite its weak economy.”
Economists in the Bloomberg survey see the BOE keeping its key rate on hold until at least 2015. On the economy, they estimate growth of 0.4 percent last quarter and 0.3 percent in the three months through September. Gross domestic product will rise 1 percent this year and 1.6 percent in 2014, according to the median of 47 forecasts.