Carney’s Maiden BOE Speech to Confront Guidance Skeptics

Mark Carney’s first policy speech as Bank of England governor is his chance to address investor doubts that he can keep interest rates on hold at a record low until at least late 2016.

Carney introduced so-called forward guidance this month to prevent a pickup in borrowing costs from undermining the economic recovery. Since then, investors have begun raising bets on higher rates before 2016 and pushed up gilt yields. Carney will address business leaders at 1:45 p.m. in Nottingham, England, and hold a news conference after the event.

Today’s speech will test his ability to push back rate expectations amid growing evidence the recovery is gaining traction. Deputy Governor Charlie Bean said last week he was “a little bit surprised” by investors’ reaction to the plan to keep rates unchanged at least until unemployment, now at 7.8 percent, falls to 7 percent.

“He’ll have to come out and reiterate that the pickup in interest rates is unwarranted, though I’m not sure it’s enough,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc. “The markets are going to test this new framework and the question is how far they push this until they get a response.”

Today’s event, hosted by the Confederation of British Industry, will include audience questions after the speech. When Carney unveiled the guidance plan on Aug. 7, he took questions for an hour and gave five broadcast interviews.

Bean’s Signal

U.K. government bonds rose yesterday after Bean said in an interview that policy makers are sending a “clear signal” that they won’t increase interest rates anytime soon. The rate on the 1.75 percent bond maturing in September 2022 dropped 12 basis points.

The yield on the 2.25 percent security due in September 2023 was little changed at 2.78 percent today.

Short-sterling futures have fallen this month, indicating investors are increasing their bets on higher interest rates. The implied yield on the contract expiring in September 2015 was at 1.27 percent. It’s up 33 basis points since July 31.

The BOE has forecast that the 7 percent threshold won’t be reached until at least the fourth quarter of 2016. The policy framework includes so-called knockouts, including one that says the plan is voided if policy makers decide medium-term inflation is likely to breach 2.5 percent.

That clause triggered dissent within the BOE’s Monetary Policy Committee, with Martin Weale voting against guidance. He said in an interview with the Financial Times published Aug. 26 that people may interpret the knockout as a weakening of the MPC’s 2 percent inflation target.

Economic Improvement

Since Carney joined the BOE on July 1 from the Bank of Canada, the U.K. recovery has shown signs of strengthening. The economy grew 0.7 percent in the second quarter and manufacturing and services gauges improved last month. That’s compounded a selloff in gilts sparked by the Federal Reserve’s debate about when to taper its $85 billion of monthly stimulus.

“I don’t see what other levers he can pull,” Michael Hewson, an analyst at CMC Markets Plc in London, said on Bloomberg Television today. “I don’t think quantitative easing is anything he can talk about or do because I don’t think the data warrants it.”

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