Carney BOE Guidance Seen Pushing QE on Back BurnerScott Hamilton and Jennifer Ryan
Mark Carney’s push to give greater insight into the U.K. policy outlook may put quantitative easing on the backburner after four years as the Bank of England’s primary support for the economy.
The BOE governor probably voted to hold bond purchases at 375 billion pounds ($566 billion) at the July 4 Monetary Policy Committee meeting, according to 30 of 45 economists in a Bloomberg survey. Minutes of the meeting, when the BOE gave unprecedented guidance on interest rates, will be published in London tomorrow.
Carney joined the 319-year-old institution on July 1 and his statement aimed at steering investors’ expectations helped push the 10-year gilt yield to the lowest in almost three weeks. A vote against QE would further set him apart from his predecessor, Mervyn King, whose attempt to increase stimulus was foiled by an MPC majority citing rising inflation expectations.
“Forward guidance is a done deal,” said Alan Clarke, an economist at Scotiabank in London. “To some extent it reduces the chance of more QE because rather than actually delivering easier policy, you’re verbally intervening to keep yields lower. It’ll be easier to get a consensus around guidance than QE.”
The MPC minutes will also probably show the panel split 7-2 on QE this month, according to 15 of 20 economists in another survey. In June, the division was 6-3, when David Miles and Paul Fisher voted for more gilt purchases, along with King at what was his last meeting.
The BOE last expanded QE in July 2012 when it began a three-month round of purchases. Since then, it started a program with the U.K. Treasury aimed at boosting credit. The central bank won’t expand bond purchases again this year, according to the median of 20 economists in another survey. In May, economists forecast an increase of 25 billion pounds by the end of 2013.
The change in the outlook for QE comes as the economy shows signs of improvement. Measures of services, manufacturing and construction all strengthened in June, while the National Institute of Economic and Social Research estimates economic growth accelerated to 0.6 percent in the second quarter.
“The hawks aren’t likely to want to inject a lot of extra stimulus. They worry about the effect of QE on other financial markets and the search for yield, and that makes them less keen,” said Rob Wood, chief U.K. economist at Berenberg Bank and a former BOE official. “Forward guidance could be a way of ensuring that the required stimulus remains priced in.”
The BOE, which is analyzing the use of thresholds in policy guidance for a review due to be published next month, took a step toward managing investor expectations on July 4.
In response to a surge in yields after Federal Reserve Chairman Ben S. Bernanke signaled on June 19 the U.S. central bank may start tapering its monthly stimulus program this year, the BOE said the “implied rise in the expected future path of bank rate was not warranted by the recent developments in the domestic economy.”
“All the discussions we are having at the moment are more about whether we should be giving forward guidance and using thresholds and whether we should be giving more stimulus rather than discussing what the exit strategy will be,” Fisher told lawmakers at Parliament’s Treasury Committee in London today. “We’ll get to that no doubt when we get closer to exit.”
The yield on the 10-year gilt dropped 6 basis points to 2.28 percent as of 1:24 p.m. London time. That’s 72.3 basis points higher than equivalent German bunds, down from 76.9 basis points at the end of last week. The yield fell to 2.29 percent on July 12 after rising to as high as 2.59 percent on June 24.
Investors have also pushed back bets on the timing of a rate increase. The BOE’s benchmark is currently 0.5 percent. The implied yield on the short-sterling futures contract expiring in March 2015 was 0.78 percent today.
The BOE will publish the MPC minutes at 9:30 a.m. in London tomorrow. At the same time, the Office for National Statistics will release labor-market numbers that economists predict will show falling jobless claims in June and an unchanged unemployment rate of 7.8 percent in the quarter through May.
Data today showed inflation accelerated less than economists forecast to 2.9 percent in June from 2.7 percent in May. That compares with the BOE’s target of 2 percent.
Economists see Carney aligning the BOE closer to the Fed by tying guidance to economic developments, according to Bloomberg survey published on July 12. The U.S. central bank in December linked policy to inflation forecasts and unemployment.
Still, QE remains among the BOE’s tools to use and the central bank has restarted it before after a lengthy pause, including a two-year gap to October 2011. David Tinsley, chief U.K. economist at BNP Paribas SA in London and a former BOE official, expects purchases to resume next month.
“If they don’t do more in August to signal their intent on Guidance, it will slip to being a crisis response measure, like in the past,” he said. “It would probably slip off the agenda for a quarter unless the data weaken.”