Carney's Rate Message Is Slowly Resonating With Economists

  • More banks now see a Bank of England tightening this year
  • Number may rise as firms tear up outlook on hawkish BOE shift

Economists are gradually starting to buy what Mark Carney is selling.

After Bank of England policy makers said last week that an interest-rate increase may be needed in coming months, 11 firms now expect a hike in the fourth quarter of this year, according to a Bloomberg survey. While that’s still a minority, it’s up from three last month and may climb further as economists continue to tear up their forecasts in light of the bank’s hawkish shift.

The revisions by some of Europe’s biggest banks, including HSBC Holdings Plc, Barclays Plc and Deutsche Bank AG, come at a time when investors also feel more bullish on the chances of a hike. Money markets are now fully pricing in a 25-basis-point increase by February, a year earlier than expected the week before the BOE’s Sept. 14 meeting.

The reaction is a marked contrast to those following Carney’s previous signals that policy would be tightened by more than the market expected, which left traders and forecasters largely cold. That means that despite the slew of changes in the latest Bloomberg survey, conducted from Sept. 8-18, the median forecast for the first hike has so far only moved slightly to the first quarter of 2019.

Money markets have been quicker to react. They now expect at least two rate rises by that point, and put the chances of an increase in November at about 70 percent.

Nathan Thooft, senior portfolio manager at Manulife Asset Management, discusses the BOE and markets.

Markets: European Close." (Source: Bloomberg)

BOE officials said last week that data since their last decision points to a “slightly stronger picture than anticipated,” putting them on course to raise rates for the first time in more than a decade. Even so, they have warned that considerable risks remain to the outlook, especially as lawmakers continue their so-far fractious negotiations to leave the European Union.

That caveat may be staying the hand of some economists for now, while others may be waiting for key U.K. data releases next month before they reassess their view on the BOE’s rate path. 

Prime Minister Theresa May on Friday is set to share her thoughts on where she sees Brexit going, with speculation she will use her speech to signal that Britain will keep paying money to the EU after it quits the bloc.

Governor Carney attempted to push the BOE’s message when he spoke on Monday, saying Brexit is making it harder for the economy to grow without generating inflationary pressures. Even so, his reminder that there “remain considerable risks to the U.K. outlook” pushed the pound lower, underscoring the challenge the central bank faces in aligning both markets and investors with their view.

— With assistance by Josh Robinson

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