Carney Risks Letdown as BOE Seen Resisting More QE: U.K. Credit
Bank of England policy makers will probably hold fire on stimulus today, leaving Governor Mark Carney with an anti-climactic end to his first week after being hired to drive the economy to “escape velocity.”
The nine-member Monetary Policy Committee will keep both quantitative easing and the benchmark interest rate unchanged, according to two Bloomberg News surveys of economists. Former Governor Mervyn King failed since February to persuade a majority to back his call to expand QE, and to avoid a flop this week Carney’s option may be a statement, something the MPC typically doesn’t do when there has been no change to policy.
Carney is the first foreigner to run the 319-year-old central bank and his arrival has coincided with reports signaling the U.K. economy is strengthening, which may reduce the need for more monetary stimulus. Still, with the recovery not yet assured and bond yields rising, the MPC is reviewing new tools such as forward guidance and a statement now would provide a stopgap before Carney reports on deliberations in August.
“He’s come in with the promise of shaking things up, and it would be a letdown if he did nothing,” said Keith Wade, chief economist at Schroders Plc (SDR) in London, which has $359 billion under management. “A statement of intent would be a way of doing something when it’s too soon to be turning around the majority or changing the policy toolkit.”
The pound fell 0.1 percent against the dollar and traded at $1.5264 as of 8:29 a.m. London time. It’s risen 4 percent against its nine developed-nation peers in the last three months, according to Bloomberg Correlation-Weighted Indexes. Only the euro has gained more.
The BOE will announce its decisions at noon in London. The bond-purchase target will be kept at 375 billion pounds ($573 billion), according to all 44 economists in a Bloomberg survey. The key rate will stay at 0.5 percent, a record low, a separate survey shows.
Carney, previously governor of the Bank of Canada, has indicated a preference for further action. He said central banks aren’t “maxed out” and that guidance on future policy can help them respond to economic shocks and financial imbalances. A statement today would be a way of expanding BOE communication without changing policy settings.
“When you get a new governor you have to expect different things to be done,” said George Buckley, an economist at Deutsche Bank AG in London. “It may be that Carney thinks it’s appropriate to say what his thoughts are on his first outing. It could be the start of a new approach to policy decisions.”
Any push by Carney for further stimulus may be derailed by the BOE’s decision-making process. Unlike Canada, where he had sole legal power to set rates and use other tools, he has one vote on the MPC. In June, six members opted to keep QE on hold.
The majority may now be even harder to shift amid signs the recovery has found a firmer footing. Services and manufacturing growth accelerated to their fastest in more than two years in June. A report today from Halifax, the mortgage unit of Lloyds Banking Group Plc, showed U.K. house prices rose last month to the highest in almost three years.
Still, risks remain, including the recession in the euro area and a political crisis in Portugal that’s sent the nation’s bond yields soaring.
At the same time, remarks by Federal Reserve Chairman Ben S. Bernanke that the central bank may begin to taper its monthly stimulus have fueled a rout in government bonds around the world. The yield on the 10-year gilt rose to the highest since 2011 on June 24 and was at 2.41 percent today. The spread over equivalent German bunds was 74 basis points, the widest in almost three years.
The Fed and European Central Bank both issue statements along with each policy decision, regardless of whether there’s been a change. The ECB will hold its key interest rate at 0.5 percent, according to 61 of 62 economists in a Bloomberg survey. The bank will announce the decision at 1:45 p.m. in Frankfurt and President Mario Draghi will hold a press conference 45 minutes later.
The last time the MPC issued a statement without an accompanying change in policy was in February this year, when officials said they’d reinvest the first gilts to mature since asset purchases started in March 2009. It also released a statement in February 2010, when it voted not to expand QE for the first time since its inception.
Chancellor of the Exchequer George Osborne persuaded Carney to join the BOE to help revive the U.K. economy, saying he had the “fresh perspective needed.”
Since the appointment, Osborne affirmed the BOE’s right to use unconventional tools to stoke growth, including forward guidance. He also asked it to assess how intermediate thresholds would work and to report back in August, when Carney will hold a press conference to present the BOE’s new economic projections.
Simon Hayes, a former BOE economist now at Barclays Plc in London, said the MPC won’t issue a statement today and “monetary inactivism” will prevail until August.
“Although it is possible that Governor Carney will take a different view, and encourage the committee to be more communicative as a matter of course, we think any change in approach will take time to emerge,” Hayes said.
For Rob Wood at Berenberg Bank, who also worked at the BOE, the communications limits of a written statement compared with a press conference weigh against one today.
“The latest data are very encouraging, there is light at the end of the tunnel though the U.K. isn’t out of the woods yet,” he said. “I’m not expecting very much from this policy decision. It’s only a month until they can say much more.”
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