Carney Seen Tempering Optimism as BOE Holds Record-Low RateScott Hamilton
Bank of England Governor Mark Carney may have to curb investors’ enthusiasm about the strength of the economy if he wants to keep the recovery on track.
Improving U.K. data has helped boost sterling 5.6 percent against the dollar since the start of July and the Monetary Policy Committee has warned that continued appreciation could hamper export growth. The MPC kept its key interest rate at a record-low 0.5 percent today and its bond-purchase program at 375 billion pounds ($603 billion), as forecast by all economists surveyed by Bloomberg.
The decisions were made with new economic projections that the BOE will release next week. While it will probably raise its growth forecast, the issue for Carney is how this feeds into the outlook for unemployment, which he has linked to policy by setting a 7 percent jobless level as the threshold for considering a rate increase. While the MPC doesn’t expect to hit that point until late 2016, according to its last estimates in August, investors have bet it will happen sooner.
“It’s going to be a prolonged period where there’s no change and no great sense of urgency,” Ross Walker, an economist at Royal Bank of Scotland Group Plc in London, said in a telephone interview. “The risks continue to diminish, but they’re not totally negligible, so the MPC is still able to point to those as a factor for maintaining the current accommodative policy settings.”
The European Central Bank cut its key interest rate by 25 basis points to 0.25 percent today. The move wrongfooted all but three of 70 economists in a Bloomberg survey and the euro dropped against the dollar and the pound after the decision.
The pound gained 2.6 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. Sterling weakened against the dollar after the BOE and ECB decisions. It was at $1.6053 as of 12:53 p.m. London time, down 0.2 percent on the day.
The 10-year gilt yield was at 2.71 percent. While it’s fallen from this year’s high of more than 3 percent in September after the Federal Reserve unexpectedly refrained from tapering its monthly stimulus, it’s still up about 27 basis points since Carney joined the BOE on July 1.
The MPC may also want to prevent investors pricing in an interest-rate increase too early. Short sterling futures declined this week as stronger-than-forecast data prompted investors to add to bets on higher rates. The implied yield on the contract expiring in September 2015 was at 1.18 percent today, up from 1.12 percent on Nov. 1.
“They’ll want to err on the side of caution and they want to give growth every chance,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “They want to keep everything as accommodative as possible.”
Carney will publish the MPC’s new projections in London on Nov. 13, after which he will give a press conference. Minutes of today’s meeting will be published a week later.
While the MPC has acknowledged the pound’s advance will reduce imported inflation, it also said in the minutes of its October meeting that the currency move would “dampen export growth in the medium term.” With the euro-area remaining weak, there’s a risk the recovery “might be less well balanced between exports and domestic consumption.”
Part of sterling’s advance has been because of the strengthening recovery, which has put Britain on course for its fastest growth since 2010. Industrial production rose 0.9 percent in September, rebounding from a slump the previous month. A survey on Nov. 5 showed services growth accelerated to the fastest in 16 years last month. The unemployment rate has fallen to 7.7 percent from 7.8 percent since Carney took over.
The BOE “are going to do nothing for a very long time,” Daniel McCormack, a strategist at Macquarie Securities Ltd. in London, said in a Bloomberg Television interview. “Growth has been excellent, but there’s an enormous amount of spare capacity so we need to see above-trend growth for a very long period of time before the BOE will even begin thinking about tightening.”