BOE Leaves Policy Unchanged as Carney’s Guidance Assessed

Bloomberg: Bank of England officials left their bond-buying program unchanged today as they assessed the impact of Governor Mark Carney’s forward guidance policy to keep interest rates low amid a strengthening economic recovery.

The Monetary Policy Committee, after meeting for the first time since introducing guidance last month, held the target for asset purchases at 375 billion pounds ($586 billion), as forecast by all 38 economists in a Bloomberg News survey. It also kept its key interest rate at a record low 0.5 percent.

Carney’s guidance is linked to unemployment and signals interest rates will remain on hold until late 2016 as long asinflation remains in check. While he reiterated that message in a speech in Nottingham last week, the growth surge at factories and service companies this quarter has stoked investor doubts that joblessness will fall as slowly as the MPC forecasts, pushing U.K. borrowing costs to a two-year high.

“Carney presumably feels that his speech in Nottingham last week set the BOE’s stall out clearly enough,” said James Knightley, an economist at ING Bank NV in London. “Markets, ourselves included, suspect that the first rate hike is more likely to come in early to mid-2015 than the third quarter 2016 date suggested by the BOE.”

The pound advanced against the dollar after the decisions, and was at $1.5654 as of 12:10 p.m. London time, up 0.2 percent from yesterday. Economists at banks including Bank of America Merrill Lynch and Royal Bank of Scotland Group Plc had said the MPC might have issued a statement today.

Gilt Yields

Carney introduced guidance on Aug. 7 and said the BOE won’t consider raising its benchmark rate until unemployment falls to 7 percent, which it doesn’t see happening for another three years. The jobless rate was 7.8 percent in the second quarter.

The 10-year gilt yield has risen more than 50 basis points since the MPC last met on Aug. 1 and reached 2.93 percent today, the highest since July 2011.

Short sterling futures have fallen, indicating investors are increasing bets on interest rates rising before 2016. The implied yield on the contract expiring in December 2015 was at 1.72 percent, up from 1.07 percent on Aug. 1.

ECB Dilemma

European Central Bank President Mario Draghi is facing a similar dilemma as signs of a strengthening euro area prompt questions over whether he can stick to his commitment to keep rates low for an extended period. The ECB’s Governing Council, meeting in Frankfurt today, will maintain its key rate at 0.5 percent, according to all 56 economists in a survey. The bank will announce the decision at 1:45 p.m. local time.

Sweden’s central bank kept its main lending rate unchanged at 1 percent today and stuck to a plan to start tightening late next year.

The BOE’s nine-member policy panel met Sept. 3 and Sept. 4. Its meeting was moved forward a day to allow Carney to attend the Group of 20 summit starting today in St. Petersburg, Russia. The decision to keep the key rate unchanged was predicted by all 44 economists in a Bloomberg poll. Minutes of this week’s meeting will be published on Sept. 18.

The U.K. central bank’s guidance includes so-called knockouts linked to its 2 percent inflation goal. Carney said last week that underlying price pressure is “subdued” and inflation will fall back over the next two years from 2.8 percent in July.

Economic Outlook

Britain’s economy grew 0.7 percent in the second quarter with all main sectors showing expansion. Surveys this week by Markit Economics showed services expanded the most since 2006 last month and factory activity increased to a 2 1/2-year high.

The Markit reports also indicated companies are meeting increased demand by boostingproductivity rather than hiring. There was only “marginal” growth in services employment, and inmanufacturing payrolls growth was “muted,” it said.

The BOE has forecast that an improvement in productivity will curtail payrolls growth and keep inflation in check. It said Aug. 7 the outlook for price growth was similar to May because the “stronger demand outlook is assumed to be largely matched by a faster expansion in effective supply capacity.”

In a speech last week, Carney sought to convince business leaders that he will stick to his plan to keep rates low, saying the central bank won’t tighten policy “until jobs, incomes and spending are recovering at a sustainable pace.”

While his message has so far focused on consumers and executives, he has noted the potential threat to the recovery from rising borrowing costs and said the MPC is ready to act.

Scotiabank economist Alan Clarke in London said the MPC can afford to set aside concerns on market rates for now as it focuses on keeping stimulus loose enough to ensure the recovery. The economy is more than 3 percent below its peak before the financial crisis struck.

“If you pick a fight with the market and it continues to sell off, that’s a fight they don’t need to pick,” he said. “It would be a case of the lady doth protest too much.”

reporters on this story: Scott Hamilton in London