Carney Changes Tone Ahead of Bank’s Key MeetingBy
Governor said policy makers may need to begin raising rates
Comments come as officials present contrasting policy views
Don’t expect a quiet summer break. The stage is set for an exciting Bank of England meeting in August.
Just one week after he said it’s not yet time to increase interest rates, Governor Mark Carney on Wednesday shifted his emphasis, saying that policy makers may need to begin raising them and will debate it in the coming months.
His comments come after a fortnight of speculation over the outlook for policy tightening, sparked by dissenting calls for a hike by three of eight policy makers at their June meeting and a fourth subsequently suggesting he might follow suit.
“Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional,” Carney said in prepared introductory remarks for a panel at the European Central Bank Forum in Sintra, Portugal.
His comments gave the pound its biggest jump since April against the dollar and prompted investors to increase bets on a rate increase this year. Swaps data now indicate a more than 50 percent probability of hike by the end of 2017, up from 7 percent before the BOE’s June 15 meeting. The U.K. currency rose further on Thursday, gaining 0.5 percent to $1.2988 as of 10:23 a.m. in London.
Carney has been criticized for sending mixed messages in the past. Lawmakers branded him an “unreliable boyfriend” in 2014 after he abandoned guidance on raising rates once unemployment had fallen below a certain threshold.
Signs of a growing split in the Monetary Policy Committee emerged in recent weeks after outgoing official Kristin Forbes gained the support of Michael Saunders and Ian McCafferty in her call for an immediate rate increase to tackle inflation. Within days, Chief Economist Andy Haldane said that he had considered joining the dissenters and that removing some stimulus in the second half “would be prudent.”
In an interview broadcast by the BBC on Thursday, Haldane said while policy makers were happy with where borrowing costs were for now, they “need to look seriously at the possibility of raising interest rates to keep the lid on those cost of living increases.”
On the other side of the debate, Deputy Governor Jon Cunliffe said Wednesday that officials have time to see how domestic inflation pressures evolve before they need to act, as price gains have been driven by the pound’s depreciation since the Brexit referendum and wage growth remains low.
It’s not clear how Carney’s comments will affect the balance of the committee, even if he changes his stance from the last meeting. Forbes, the leading hawk, is leaving this week to be replaced by economics professor Silvana Tenreyro. A replacement for former deputy governor Charlotte Hogg is also due, meaning the panel that normally has nine members may have two new voters at the next decision.
“The August meeting is absolutely live,” said Andy Chaytor, head of European rates strategy at Nomura in London. Investors should “start to watch the data more than the central-bank speak, because I suspect for a lot of the MPC members -- whether they’re leaning toward a hike or slightly against it -- they’re probably all quite finely balanced.”
With another five weeks to go before the decision, there will be plenty of economic releases to pick through, including May wage growth figures, June inflation data and the first estimate of second-quarter growth.
Carney laid out his focus, saying he’s looking at “business investment, whether wages and unit labor costs begin to firm, and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit negotiations.” The MPC will debate those issues in the coming months, he said.
“Although ostensibly hawkish comments by Mark Carney this afternoon caused sterling to spike up, it is not clear that he was actually saying anything different,” said Martin Beck, lead U.K. economist at Oxford Economics in London. “The governor’s view continues to be very much ‘wait and see.’”
— With assistance by Scott Hamilton, and Jill Ward