Watch out for the head-fake.

Photographer: Chris Ratcliffe/Bloomberg

U.K. Rates Aren't Going Anywhere

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Mark Carney is just itching to raise interest rates. The Bank of England governor has been dying to flex his monetary policy muscles since at least August 2013, but the U.K. economy isn't playing ball. With inflation still conspicuous by its absence, Carney should curb his enthusiasm until the data justifies a move.

Almost two years ago, Carney said a jobless rate heading below 7 percent might be the trigger to tighten monetary policy. By April 2014, when unemployment dipped to 6.9 percent, he'd already abandoned that guidance. So no one is paying much attention to the current 5.5 percent figure -- a seven-year low, mind -- as a guide to when Carney might crank up borrowing costs.

On Tuesday, Carney told a panel of U.K. politicians that "the point at which interest rates may begin to rise is moving closer." In the futures market, where traders bet on where they think three-month borrowing costs will be by the end of the year, the price of money barely budged, leaving the contract rate bang in line with its average since the start of the year:

Source: Bloomberg

Moreover, Carney's latest comment came just hours after figures showed consumer prices were unchanged in June, meaning inflation hasn't been at the Bank of England's 2 percent target since the end of 2013:

Source: Bloomberg

The part of the economy that might give Carney an excuse to hike borrowing costs is the labor market, where wages are finally starting to outpace inflation. Still, the gains seen over the past six months will have to run for a while longer to compensate workers for years when real earnings declined:

Source: Bloomberg

A year ago, Carney warned that a rate rise "could happen sooner than markets currently expect." In fact, traders have been steadily scaling back their expectations for where U.K. borrowing costs will be by the end of December, based on prices in the options market:

Source: Bloomberg

I've written before about how Carney might be employing the "Maradona Theory of Interest Rates" championed by his predecessor, Mervyn King. In a May 2005 lecture, King explained England's defeat to Argentina in the 1986 World Cup in Mexico, after its striker, Diego Maradona, evaded five players on a 60-yard dash from his own half to score. "Maradona ran virtually in a straight line," King noted; but because the English defenders "expected Maradona to move either left or right, he was able to go straight on." 

Just as England's defenders expected Maradona to swerve, traders and investors may start to anticipate a shift in monetary policy, thus producing a change in credit conditions without the central bank actually acting.

Carney's comments yesterday helped drive the pound 0.6 percent higher against the dollar, while shares of U.K. homebuilders fell as much as 2.5 percent. Economists polled by Bloomberg, however, don't see higher interest rates until the first quarter of next year, at the earliest. I think they're correct; while Carney will continue to talk a good game about raising interest rates, he can afford to leave rates right where they are a while longer.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Paula Dwyer at pdwyer11@bloomberg.net