Carney Surprises Confounding Markets as BOE Manages GuidanceScott Hamilton and Emma Charlton
Mark Carney is making life harder for himself.
Lauded as “simply the best” by the man who appointed him to take over the Bank of England a year ago, Carney is now experiencing the sharper edge of public life in Britain as he struggles to articulate his vision for monetary policy.
The governor has already whipsawed investors twice this month on the timing of the BOE’s first interest-rate increase since 2007. That comes on the heels of a forward guidance strategy unveiled in August that he heralded as a source of certainty. And even before he took the job, Carney, 49, signaled he wasn’t even considering it before accepting the position three months later.
As his first anniversary on July 1 nears and he shapes up to begin the BOE’s exit from monetary stimulus, economists say he needs to hone his game.
“Carney’s communication isn’t as good as it could have been,” said Peter Dixon, an economist at Commerzbank AG in London. “There’s more work to do in his second year. Markets will perhaps attribute less weight to what the BOE tells us or they will end up reacting every which way, which means we’ll end up with more volatility.”
At a press conference today after the BOE published its Financial Stability Report, Carney responded to questions about his communications by saying his team were dedicated central bankers. The Financial Policy Committee took action to cool the booming housing market by introducing measures to limit risker mortgages and prevent an unsustainable buildup of consumer debt.
The art of surprise is a tactic that Carney deployed at the Bank of Canada -- five of his first 10 rate decisions were at odds with the economists surveys by Bloomberg News. Now it’s threatening to backfire on the first foreigner to lead the BOE in three centuries, undoing the goodwill built on the back of the fastest growing Group of Seven economy, record payrolls and below-target inflation.
“He isn’t averse to saying things that jolt the market,” said David Watt, chief economist at HSBC Holdings Plc’s Canadian unit in Toronto who previously worked at the Bank of Canada. In the U.K., “they knew the man, but they didn’t necessarily know what kind of decision maker he was.”
Having entrenched investor expectations for a rate increase in 2015 at a press conference in May, Carney shifted at the Mansion House speech in London’s financial district on June 12.
Investors brought forward bets on a quarter-point rate increase after he said tightening could start earlier than anticipated. The implied yield on the short-sterling contract expiring in December rose to as high as 0.93 percent from 0.73 percent before Carney’s speech.
Less than two weeks after that, on June 24, he rowed back, saying weak wage growth and labor-market slack weigh against rate increases soon. The BOE’s benchmark rate is at a record-low 0.5 percent, where it’s been since March 2009.
The pound increased 0.3 percent to $1.7029 as of 11:45 a.m. London time.
“If you create one impression when rates could rise and then change it again, there’s a concern that the uncertainty would rise,” said Andrew Goodwin, a London-based economist at Oxford Economics. “That goes against everything the BOE’s been trying to create with forward guidance.”
The sudden swings have been criticized by lawmaker Pat McFadden, a member of Parliament’s Treasury Committee, as akin to the behavior of an “unreliable boyfriend.” Another said Carney was indulging in “smoke and mirrors.”
That’s in contrast to the reaction Carney received at his appointment hearing at the committee, when Chairman Andrew Tyrie paid tribute to him for being “extremely lucid.”
That hearing followed Chancellor of the Exchequer George Osborne’s unexpected announcement in November 2012 that Carney would be Mervyn King’s successor.
Any surprise was partly due to Carney himself. Asked in August 2012 if he was interested in the governorship, he said he was “very focused” on his current posts and “interested in who they pick.” Questioned if his answers meant “a no or a never consider the job?” he said: “It’s both. How’s that?”
After joining the BOE in July 2013, Carney took just weeks to unveil forward guidance, which linked rates to unemployment and initially signaled borrowing costs would not go up until 2016. Six months later, he was forced to recast the flagship policy, changing its focus to spare capacity, after the jobless rate fell far faster than anticipated.
The U.K. approach was an updated form of a policy he introduced while at the Bank of Canada in 2009, when he made a conditional commitment to keep the key rate unchanged through the second quarter of 2010. He moved ahead of schedule and abandoned it in April 2010.
Explaining his Mansion House comments, Carney said that his guidance still applies and what’s more important than the timing of the first increase is the subsequent pace, which will be “gradual and limited.” He also said it was his plan to shock investors, who should have adjusted their view to reflect improving economic data.
If investors were putting too low a probability on a 2014 increase, it may be because they were taking direction from the governor himself. He said at the BOE’s Inflation Report in May that the U.K. was still facing headwinds and there was more spare capacity in the economy to be used up before officials need to tighten policy. Bank of America Merrill Lynch said at the time the tone was more “dovish” than markets had expected.
Carney’s task may become even more difficult as the recovery progresses, something he alluded to this week when he said the nine-member Monetary Policy Committee is trying to balance above-trend growth against data indicating a greater-than-estimated level of spare capacity in the economy.
“As we get nearer to the point where rates are going to go up, it’s vitally important that we get a clearer steer,” said Goodwin. “At the moment the messages are too mixed.”
For Alan Clarke, an economist at Scotiabank, Carney can’t afford to deliver another whiplash as it may weaken the second part of his guidance pledge for rates to rise only slowly.
“It’s a stumble, but on the whole I still think he’s doing a great job,” he said. “If they want us to believe in gradual, they need to make a concerted effort to not move the goal posts again on that front.”