BOE Leaves Policy Unchanged as Carney’s Guidance AssessedScott Hamilton and Jennifer Ryan
Bank of England officials left their bond-buying program unchanged today as they assessed the impact of Governor Mark Carney’s forward guidance policy to keep interest rates low amid a strengthening economic recovery.
The Monetary Policy Committee, after meeting for the first time since introducing guidance last month, held the target for asset purchases at 375 billion pounds ($586 billion), as forecast by all 38 economists in a Bloomberg News survey. It also kept its key interest rate at a record low 0.5 percent.
The 10-year gilt yield rose above 3 percent for the first time in more than two years after the decision, which didn’t include an accompanying policy statement reinforcing the MPC’s message. While the guidance signals interest rates will remain on hold until late 2016 as long as inflation remains in check, investors are betting on an increase before then.
“By issuing no statement, the MPC do not see the back up in yields as being sufficient to risk the recovery,” said Mike Amey, a money manager at Pacific Investment Management Co. in London. “As such the market has continued to sell off to new yield highs.”
The yield on 10-year gilts climbed 11 basis points, or 0.11 percentage point, to 2.99 percent at 3:04 p.m. London time after exceeding 3 percent for the first time since July 2011. Sterling slipped 0.3 percent against the dollar to $1.5584.
Sound of Silence
Short-sterling futures dropped today as investors reduced bets that policy will be loosened further. The implied yield on the September 2015 contract rose 15 basis points to 1.59 percent.
“If there is news it was in the committee’s silence,” said David Tinsley, an economist at BNP Paribas SA in London. “That seems to suggest that the committee, or enough members of it, are inclined to view some of the tightening in conditions as increasingly looking warranted by the much better U.K. data.”
European Central Bank President Mario Draghi is facing a similar dilemma as signs of a strengthening euro area prompt questions over whether he can stick to his commitment to keep rates low for an extended period. The ECB’s Governing Council, meeting in Frankfurt today, maintained its key rate at 0.5 percent, as forecast by all 56 economists in a survey.
Sweden’s central bank kept its main rate unchanged at 1 percent and stuck to a plan to start tightening late next year.
In a technical statement, the BOE said it will reinvest 1.9 billion pounds associated with redemption of the September 2013 gilt held in its asset-purchase facility. Minutes of the meeting will be published on Sept. 18.
Carney introduced guidance on Aug. 7 and said the BOE won’t consider raising its benchmark rate until unemployment falls to 7 percent, which it doesn’t see happening for another three years. The jobless rate was 7.8 percent in the second quarter.
The guidance includes so-called knockouts linked to the bank’s 2 percent inflation goal. Carney said last week that underlying price pressure is “subdued” and inflation will fall back over the next two years from 2.8 percent in July.
Britain’s economy grew 0.7 percent in the second quarter with all main sectors showing expansion. Surveys this week by Markit Economics showed services expanded the most since 2006 last month and factory activity increased to a 2 1/2-year high.
The Markit reports also indicated companies are meeting increased demand by boosting productivity rather than hiring, with “marginal” growth in services employment.
The BOE has forecast that an improvement in productivity will curtail payrolls growth and keep inflation in check. It said Aug. 7 the outlook for price growth was similar to May because the “stronger demand outlook is assumed to be largely matched by a faster expansion in effective supply capacity.”
In his speech last week, Carney sought to convince business leaders that he will stick to his plan to keep rates low, saying the central bank won’t tighten policy “until jobs, incomes and spending are recovering at a sustainable pace.”
While his message has so far focused on consumers and executives, he has noted the potential threat to the recovery from rising borrowing costs and said the MPC is ready to act.
“The MPC probably is reluctant to micro-manage the yield curve through asset purchases,” said Michael Saunders, an economist at Citigroup Inc. in London. “We suspect the MPC will only put their money where their mouth is if the rise in market rates threatens to hit growth quite severely and push growth below trend. With the recent string of upside surprises in data, that pain threshold has probably not yet been reached.”