Carney Rates Resolve Challenged as Recovery Builds: U.K. CreditScott Hamilton
Bank of England officials will probably hold fire on stimulus today as a strengthening economic recovery challenges their resolve to keep interest rates low.
The Monetary Policy Committee, after meeting for the first time since introducing forward guidance, will keep its key rate at a record 0.5 percent and bond-buying program unchanged, according to two Bloomberg News surveys. Factory and services growth surged in August, extending a recovery that’s pushed U.K. borrowing costs to a two-year high. Bank of America Merrill Lynch says the MPC may issue a statement.
Carney’s guidance is linked to unemployment and signals interest rates will remain on hold until late 2016 as long as inflation remains in check. While the pace of growth has prompted doubts among investors that joblessness will fall as slowly as the MPC forecasts, recent business surveys indicate companies are meeting increased demand by boosting productivity rather than hiring.
“Guidance gives them time just to see how this better growth feeds through to the labor market and they do have scope to sit back and observe that,” said David Tinsley, an economist at BNP Paribas SA in London and a former BOE official. “If they find that a lot of this growth is fueled by productivity gains, that will help keep a lid on inflationary pressures and help support keeping rates lower for longer.”
The MPC, which met Sept. 3 and Sept. 4, will announce its decisions at noon in London. The bond-purchase target will be kept at 375 billion pounds ($585 billion), according to all 38 economists in a survey. All 44 economists in another poll see the benchmark rate unchanged.
The committee last issued a statement with a policy decision in July, when it said the “implied rise in the expected future path of bank rate was not warranted by the recent developments in the domestic economy.”
The 10-year gilt yield has risen 52 basis points since the MPC last met on Aug. 1 and reached 2.92 percent today, the highest since July 2011. Investors demanded 94.8 basis points of extra yield to hold U.K. debt instead of German bunds as of 8:24 a.m. London time, its highest since June 10, 2010.
Short sterling futures have fallen, indicating investors are increasing bets on interest rates rising before 2016. The implied yield on the contract expiring in December 2015 was at 1.71 percent, up from 1.07 percent on Aug. 1.
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, will maintain its key rate at 0.5 percent, according to all 56 economists in a survey. The bank will announce the decision at 1:45 p.m. local time.
Sweden’s central bank kept its main lending rate unchanged at 1 percent today and stuck to a plan to start tightening late next year as a recovery gains pace.
Carney introduced guidance on Aug. 7 and said the BOE won’t consider raising its benchmark 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.
While U.K. services expanded at the fastest pace since 2006 last month, there was only “marginal” growth in employment, Markit Economics said yesterday. In manufacturing, payrolls growth was “muted in the last month as firms sought to maximize staff capacity before recruiting,” it said.
“While the knee-jerk reaction to stronger growth prospects may be to bring the expected first rate hike forward, the combination of strong output and modest employment growth actually points in the other direction,” said Jens Larsen, an economist at RBC Capital Markets in London.
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.”
Minutes of this week’s meeting will be published on Sept. 18. The record of the August decision showed some members saw the case for more quantitative easing “as compelling as in July.” They agreed there was “merit” in first supporting guidance and assessing its effect. On the other side of the argument, Martin Weale voted against introducing guidance because he wanted a tougher inflation clause.
In a 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.
“They will not want this incipient recovery cut off by tightening financial conditions,” Goldman Sachs Group Inc. economist Kevin Daly said in a Bloomberg Television interview. “We expect them to resist that with firmer communication, potentially alluding to the possibility of action.”