Carney Unites BOE on QE as Rate Guidance Review LoomsScott Hamilton
Bank of England Governor Mark Carney united officials to vote unanimously as Paul Fisher and David Miles dropped their call for more stimulus in favor of a “mixed strategy” involving guidance on the path of interest rates.
At Carney’s debut decision, the Monetary Policy Committee voted 9-0 to keep its bond-purchase program at 375 billion pounds ($570 billion). All nine also wanted to keep the key interest rate at a record-low 0.5 percent, according to the minutes of their July 3-4 meeting published today in London. A separate report showed jobless claims fell more than economists forecast in June.
Carney joined the BOE on July 1 and took a first step toward forward guidance this month, saying the central bank will keep rates low for longer than investors were betting. The MPC is scheduled to publish a review of how to steer market expectations next month and it said today the analysis would have an “important bearing” on discussions in August.
“Given the already large size of the asset purchase program, there was merit in pursuing a mixed strategy with regards to the different policy instruments,” the minutes said. “The committee’s August response to the requirement in its remit to assess the merits of forward guidance and intermediate thresholds would shed light on both the quantum of additional stimulus required and the form it should take.”
The pound erased its decline against the dollar. It rose 0.4 percent to $1.5213 as of 11:44 a.m. London time, having earlier reached $1.5246. Gilts fell, pushing the 10-year yield up 7 basis points to 2.33 percent.
For the MPC members who said the current policy setting was appropriate, “developments on the month had signalled that the recovery was becoming more firmly established.” Data today showed U.K. jobless claims fell 21,200 in June, the most in three years. Economists forecast a decline of 8,000 based on the median of 23 estimates in a Bloomberg survey.
Claims have fallen for eight straight months, taking the jobless rate to 4.4 percent, the lowest since December 2010. Based on International Labour Organisation standards, the unemployment rate in the three months through May was unchanged at 7.8 percent.
Still, the report underlined the pressure on households, with average earnings growing just 1.7 percent at a time when inflation is running at 2.9 percent. Excluding bonuses payment, annual pay growth was 1 percent.
Carney’s vote against QE further sets him apart from his predecessor, Mervyn King, whose attempt to increase stimulus was foiled by an MPC majority citing rising inflation expectations. The two other MPC members voting in recent months for more stimulus, Miles and Fisher, both dropped their call for a 25 billion-pound expansion.
The July 4 outcome was the first unanimous vote for the panel since October 2012. In a Bloomberg survey of 20 economists published on July 12, only Investec Securities forecast a 9-0 vote. Fifteen predicted a 7-2 split.
Simon Hayes, an economist at Barclays Plc in London, said while the outcome was a surprise, it doesn’t rule out the resumption of QE at a later date.
“It appears that the dovish members of the MPC have agreed to a more holistic discussion of policy options ahead of the August decision,” Hayes said. “The minutes make it clear that the doves reserve the right to reinstate their QE votes if they consider forward guidance to be insufficiently stimulatory.”
The MPC said in the minutes that an increase in market interest rates prompted by a change of stance by the U.S. Federal Reserve “represented an unwelcome tightening in monetary conditions that, were it to persist, would risk hampering the emerging recovery.”
“Given that, the committee agreed that it was important to communicate” that the market’s view on interest rates wasn’t justified, it said.
Bond yields surged after Fed Chairman Ben S. Bernanke laid out a potential timeline on June 19 for policy makers to begin slowing monthly bond purchases this year. In response, the BOE said July 4 that the “implied rise in the expected future path of bank rate was not warranted by the recent developments in the domestic economy.”
Bernanke is due to appear before Congress today on the Fed’s semi-annual monetary policy report. Treasury 10-year note yields rose 1 basis point to 2.54 percent. They touched 2.51 percent yesterday, the lowest since July 5.
Also in the U.S., the Commerce Department will publish housing starts for June and the Fed releases its analysis of current economic conditions known as the Beige Book. Economists forecast that starts climbed 5 percent to a 960,000 annualized rate.
At the BOE, the majority of the committee said that there was “reason to be believe that the recovery might gain pace in the second half of the year as confidence improved.”
After returning to growth in the first quarter, Britain’s economy has shown some signs of gaining strength. Measures of services, manufacturing and construction all improved in June, while the National Institute of Economic and Social Research estimates economic growth accelerated to 0.6 percent in the second quarter.