Mark Carney’s words don’t hold the sway they once did. At least according to the yield curve.
After the Bank of England Governor published a 49-page report and held a one-hour press conference in London on Thursday, futures traders barely shifted their bets on when the first rate increase since the financial crisis will happen.
While Carney and the eight other members of the Monetary Policy Committee used their quarterly Inflation Report to signal a hike is still some way off, they also played down the prospect of lowering the benchmark rate and projected inflation would exceed their 2 percent target in three years unless borrowing costs rise.
That fell on deaf ears. Markets are still pricing in a chance of a rate cut this year, even after Carney dismissed the idea. Deputy Governor for Monetary Policy Ben Broadbent said on Friday that while officials see “no urgency” to raise the benchmark, he also doesn’t think there’s a need to ease.
“The MPC is probably a bit worried that it doesn’t have the control of the curve that it would like in an ideal world,” said Chris Hare, an economist at Investec in London. “There’s a wedge between what the MPC wants to do with policy and the market curve. That means it’s hard to manage expectations through guidance and communication.”
The impact of Carney’s communication has waned since his arrival from Canada 2 1/2 years ago.
He initially linked monetary policy to the labor market, only to have to rethink that forward-guidance strategy within months after unemployment fell faster than forecast. Less than a year later, sterling had its biggest daily gain in two months after he used his Mansion House address to warn that interest rates could increase earlier than markets expected. He quickly rowed back on his message, leading one British lawmaker to dub him an “unreliable boyfriend.”
``The overwhelming story here is one of softening growth, and a persistent lack of inflationary pressure, which is a global phenomenon'' said Daniela Russell, a portfolio construction associate at Legal & General Group Plc. ``It makes sense for the market to price some risk of cuts, even though it is still a long way off actually happening.''