Carney Seen Enforcing QE Truce as Guidance Kicks In: U.K. Credit

Bank of England Governor Mark Carney will probably oversee another stimulus pause at his second policy meeting as he trains officials’ focus on providing forward guidance to cement the economic recovery.

The nine-member Monetary Policy Committee will hold its target for quantitative easing at 375 billion pounds ($571 billion) and the benchmark interest rate at 0.5 percent today, according to the median estimate in two Bloomberg News surveys. The panel’s vote for no change last month was unanimous, ending an eight-month stretch of split decisions.

Carney will present the MPC’s review of steering policy expectations next week after saying in July that changes in bets on future interest rates were “not warranted,” which helped lower 10-year gilt yields about 20 basis points from a June 24 high. With the economy strengthening, that may add to the case for holding stimulus and focusing on giving companies and households certainty about rates to encourage spending.

“The domestic and external risks to the recovery are receding, and no more QE is required,” said James Knightley, an economist at ING Bank NV in London. “If you can give people assurance that there won’t be a sudden hike in the cost of borrowing, that may help the recovery along.”

Guidance Steps

Carney’s first policy decision on July 4 marked the 319-year-old central bank’s first steps into guidance, with the MPC issuing a statement that investors’ expectations of when the BOE would begin rate increases were premature.

European Central Bank President Mario Draghi pledged the same day to keep rates low for an “extended period.” The ECB will announce its latest policy decision at 1:45 p.m. in Frankfurt, when it will keep its key rate at a record low 0.5 percent, according to all but one of 63 economists in a survey.

The MPC’s statement responded to a jump in bond yields sparked by Federal Reserve Chairman Ben S. Bernanke’s June 19 comments on the timing for unwinding QE in the U.S. The increase represented an “unwelcome tightening in monetary conditions” that could scupper the recovery, the BOE said.

The Fed said yesterday after a meeting of policy makers that persistently low inflation could hamper the economic expansion and pledged to keep buying $85 billion in bonds every month.

Yields Decline

The yield on the 10-year gilt was 2.301 percent as of 9:36 a.m. London time. It rose to 2.59 percent on June 24, the highest since 2011. The premium investors charge to hold U.K. debt over German bunds was at 69.7 basis points, down from 74 basis points two weeks ago.

Carney joined the BOE from the Bank of Canada, where he introduced forward guidance in 2009, and now must fulfill a directive from Chancellor of the Exchequer George Osborne to assess introducing the strategy in the U.K. He’ll present the bank’s analysis on Aug. 7 along with new economic forecasts.

The BOE said in the minutes of its July meeting that the findings will have an “important bearing” on today’s decision, though any announcement on guidance or thresholds will be made next week. The minutes also showed Paul Fisher and David Miles dropped their call for more QE in favor of a “mixed strategy.”

“We could well see another unanimous decision for no additional stimulus,” said Simon Wells, an economist at HSBC Holdings Plc in London and a former BOE official. “Some members see forward guidance as being about reinforcing the recovery that’s underway, and their job now is not to kill it off.”

Recovery Momentum

Since the July decision, reports have shown the recovery gained traction. The economy expanded 0.6 percent in the second quarter after growing 0.3 percent in the first three months of the year, and unemployment claims fell at the fastest pace in three years in June. A report today showed manufacturing growth accelerated to the fastest in 28 months in July.

Next Plc, the U.K.’s second-largest clothing retailer, this week increased the higher end of its full-year profit target by 10 million pounds to 675 million pounds as it sold more summer items at full price. Reckitt Benckiser Group Plc, the maker of Nurofen painkillers, said on July 29 that sales growth this year will be at the higher end of its forecast range.

Still, credit data show that lending remains weak, suggesting further measures are needed to complement the BOE’s Funding for Lending Scheme. Mortgage approvals dropped in June and business lending fell 1.3 billion pounds,

Forward guidance should bolster consumer borrowing “by providing reassurance that interest rates will stay low for a prolonged period,” Martin Beck, an economist at Capital Economics Ltd. in London, said in a research note. “But with memories scarred by recent experience, and banks seeking to rebuild capital, the expansion in credit looks set to remain modest.”

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