Carney Fails to Unite BOE on Guidance as Weale DissentsScott Hamilton
Bank of England Governor Mark Carney failed to unite policy makers on implementing forward guidance as they split on whether the plan took a strong-enough stance against inflation.
The Monetary Policy Committee voted 8-1 with Martin Weale dissenting, according to the minutes of its Aug. 1 meeting. While supporting guidance, Weale disagreed with a clause on concern it may undermine the BOE’s inflation-fighting credibility. Under the program, the MPC plans to keep its key interest rate at 0.5 percent as long as unemployment exceeds 7 percent. Data today put it at 7.8 percent in the second quarter.
The division may undermine a policy introduced by Carney last week to quell investor bets on higher interest rates. The plan is subject to caveats, including a “knockout” if inflation is seen more than half a percentage point above the BOE’s 2 percent target 18 to 24 months ahead. Weale wanted a shorter period.
“It suggests to me that the eight is a fragile eight and others were nervous but felt they had to go along with Carney,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc in London. “On this critical issue he wasn’t able to forge a consensus.”
Short-sterling futures contracts expiring in September 2016 fell, a sign that traders were adding to bets for higher interest rates. The implied yield on the contract rose seven basis points to 2.05 percent, the highest level since June.
The labor-market report today showed that jobless claims fell for a ninth straight month in July, declining 29,200 to 1.44 million. That took the claimant-count rate to 4.3 percent, the lowest since February 2009. Economists had forecast a decline of 15,000, based on the median of 29 estimates.
The broader three-month rate, which is now in the spotlight as the BOE’s threshold on guidance, was in line with the median of 30 forecasts in a Bloomberg News survey. The BOE sees that measure not falling to 7 percent until at least the fourth quarter of 2016. Both youth and long-term unemployment rose in the second quarter.
The better labor-market data adds to recent evidence that Britain’s economy is strengthening after growing 0.6 percent in the three months through June. Indexes of manufacturing, services and construction all improved in July.
The pound rose against the dollar, climbing 0.2 percent to $1.5475 as of 11:44 a.m. London time. The 10-year gilt yield rose 2 basis points to 2.62 percent. It earlier reached 2.64 percent, the highest since Oct. 2011.
In the MPC’s guidance vote, Weale dissented “to register his preference for a time horizon for the first inflation knockout that was shorter than proposed,” the minutes said. “That would make clear that the forward guidance was fully compatible with the committee’s commitment” to the 2 percent inflation goal.
The report added that Weale intends “to form his future judgments about the application of guidance and the knockout criteria in line with the framework adopted by the committee.”
The minutes “will hardly help to reassure the markets about how firm the MPC’s commitment is,” said Vicky Redwood, chief U.K. economist at Capital Economics Ltd. in London. “The MPC may have to take further action to head off what it has termed the ‘unwarranted’ rise in market rate expectations.”
At the meeting on Aug. 1, the MPC voted unanimously to keep its quantitative-easing program at 375 billion pounds ($579 billion) and its benchmark interest rate at a record-low 0.5 percent. A minority said the case for more QE was “compelling,” though they said there was “merit in first supporting” guidance and waiting to assess its impact.
For those in favor of no more bond purchases, they said the onus on monetary policy “was to reinforce the recovery by ensuring that stimulus was not withdrawn prematurely.” They said they didn’t rule out more QE if needed.