Bank of England Governor Mark Carney and his colleagues are debating how they can reflect the strength of the U.K. economy in their forecasts without suggesting that interest rates are about to go up.
Officials are compiling a new quarterly economic outlook, due to be published next week, and reviewing how to guide expectations after unemployment plunged to within a whisker of the threshold for considering an interest-rate increase.
Carney says he’s in no rush to end emergency stimulus, and economists expect the Monetary Policy Committee to keep the benchmark rate at 0.5 percent at its monthly decision today.
Carney faces the biggest test of his credibility since unveiling the flagship policy six months ago as he seeks to convince households and businesses that the economy has enough spare capacity to extend almost five years of record-low borrowing costs.
Officials stress that Britain faces risks from a euro-area economy struggling to gain traction and emerging-market turmoil.
“The big picture is the tightening labor market and that means an interest rate hike has to come sooner than they previously said,” said Rob Wood, an economist at Berenberg Bank in London and a former BOE official.
“The difficulty is, because they have made quite a large forecast error, it requires a bit of an ‘about-face’ in terms of what they may have been planning.”
‘Way to Run’
All 57 economists in a Bloomberg survey predicted that the MPC would keep its key rate unchanged today, while all 44 in a separate poll forecast there would be no change to the size of its 375-billion pound ($612 billion) bond-purchase program.
The central bank announces the decisions at noon in London. The U.K. economy grew at its strongest pace since 2007 last year, pushing the jobless rate to 7.1 percent in the three months through November.
That’s just above the 7 percent level officials identified as the point for thinking about raising rates. When the policy was announced in August, unemployment stood at 7.8 percent and was not projected by the BOE to hit the threshold until 2016.
The shift has forced Carney to emphasnt is a threshold and not a trigger. Last week, he said the economy has “some way to run” before oize that 7 percent unemployment is a threshold and not a trigger. Last week, he said the economy has “some way to run” before officials move away from emergency stimulus.
Rate Bets
While his argument has been made easier by moderating inflation, Citigroup Inc. and Nomura International Plc are forecasting the bank will raise the benchmark rate -- on hold since March 2009 -- as early as this year.
The pound has risen 3.5 percent over the past three months, the most among 10-developed nation currencies tracked by Bloomberg. Sterling fell 0.1 percent today against the dollar and was trading at $1.6292 as of 10:24 a.m. London time.The benchmark 10-year government bond yield was little changed at 2.72 percent.
“It is undoubtedly true that the run of strong data in the U.K. over recent weeks, particularly GDP and unemployment, have led many observers to bring forward their expectations for the timing of BOE tightening,” said RBC Capital Markets Chief European Economist James Ashley.
“But none is so aggressive as to expect anything just yet.”
The Bank of England may say it plans to reinvest the proceeds of bonds with a face value of 8.2 billion pounds that mature on March 7.
The 2.25 percent securities are held as part of its asset-purchase plan, which began in 2009. The BOE said in August it intends to reinvest cash relating to all maturing gilts until the 7 percent jobless threshold is reached.
ECB Decision
The European Central Bank’s Governing Council, which meets today in Frankfurt, pledged in July to keep rates low for an “extended period.”
Sixty-two out of 66 economists in a survey say it will keep its benchmark rate at a record-low 0.25 percent when the bank announces its decision at 1:45 p.m. local time. President Mario Draghi will hold a press conference 45 minutes later.
The U.K. economy grew 0.7 percent in the fourth quarter and surveys of manufacturing, services and construction show continued expansion at the start of the year.
Economists in a Bloomberg survey forecast growth of 2.6 percent this year. Against that, waning inflation may give the central bank scope to delay tightening, with consumer-price growth slowing to the BOE’s 2 percent target for the first time in more than four years in December.
GDP is also 1.3 percent below its pre-recession peak in early 2008. Carney has cited weakness in the euro-area economy, high debt levels and the threat to exports from the pound’s strength as reasons to keep policy loose.
Next Phase
On Feb. 12, the Bank of England publishes its quarterly Inflation Report, giving Carney an opportunity to explain what the next phase of guidance might look like.
Economists say options include lowering the threshold or using Federal Reserve-style language to indicate that rates can remain on hold well after unemployment drops below 7 percent.
Some economists including Ashley at RBC flag the possibility that the MPC may publish a statement giving more detail on their thinking alongside its policy decisions today.
“It is unclear whether any putative change will be unveiled simultaneously” with today’s announcement, “or alternatively at next week’s Inflation Report press conference,” he said.
“So although we are not expecting anything from the MPC, it pays to watch closely lest there is a formal substantive statement.”
bloomberg.com
Officials are compiling a new quarterly economic outlook, due to be published next week, and reviewing how to guide expectations after unemployment plunged to within a whisker of the threshold for considering an interest-rate increase.
Carney says he’s in no rush to end emergency stimulus, and economists expect the Monetary Policy Committee to keep the benchmark rate at 0.5 percent at its monthly decision today.
Carney faces the biggest test of his credibility since unveiling the flagship policy six months ago as he seeks to convince households and businesses that the economy has enough spare capacity to extend almost five years of record-low borrowing costs.
Officials stress that Britain faces risks from a euro-area economy struggling to gain traction and emerging-market turmoil.
“The big picture is the tightening labor market and that means an interest rate hike has to come sooner than they previously said,” said Rob Wood, an economist at Berenberg Bank in London and a former BOE official.
“The difficulty is, because they have made quite a large forecast error, it requires a bit of an ‘about-face’ in terms of what they may have been planning.”
‘Way to Run’
All 57 economists in a Bloomberg survey predicted that the MPC would keep its key rate unchanged today, while all 44 in a separate poll forecast there would be no change to the size of its 375-billion pound ($612 billion) bond-purchase program.
The central bank announces the decisions at noon in London. The U.K. economy grew at its strongest pace since 2007 last year, pushing the jobless rate to 7.1 percent in the three months through November.
That’s just above the 7 percent level officials identified as the point for thinking about raising rates. When the policy was announced in August, unemployment stood at 7.8 percent and was not projected by the BOE to hit the threshold until 2016.
The shift has forced Carney to emphasnt is a threshold and not a trigger. Last week, he said the economy has “some way to run” before oize that 7 percent unemployment is a threshold and not a trigger. Last week, he said the economy has “some way to run” before officials move away from emergency stimulus.
Rate Bets
While his argument has been made easier by moderating inflation, Citigroup Inc. and Nomura International Plc are forecasting the bank will raise the benchmark rate -- on hold since March 2009 -- as early as this year.
The pound has risen 3.5 percent over the past three months, the most among 10-developed nation currencies tracked by Bloomberg. Sterling fell 0.1 percent today against the dollar and was trading at $1.6292 as of 10:24 a.m. London time.The benchmark 10-year government bond yield was little changed at 2.72 percent.
“It is undoubtedly true that the run of strong data in the U.K. over recent weeks, particularly GDP and unemployment, have led many observers to bring forward their expectations for the timing of BOE tightening,” said RBC Capital Markets Chief European Economist James Ashley.
“But none is so aggressive as to expect anything just yet.”
The Bank of England may say it plans to reinvest the proceeds of bonds with a face value of 8.2 billion pounds that mature on March 7.
The 2.25 percent securities are held as part of its asset-purchase plan, which began in 2009. The BOE said in August it intends to reinvest cash relating to all maturing gilts until the 7 percent jobless threshold is reached.
ECB Decision
The European Central Bank’s Governing Council, which meets today in Frankfurt, pledged in July to keep rates low for an “extended period.”
Sixty-two out of 66 economists in a survey say it will keep its benchmark rate at a record-low 0.25 percent when the bank announces its decision at 1:45 p.m. local time. President Mario Draghi will hold a press conference 45 minutes later.
The U.K. economy grew 0.7 percent in the fourth quarter and surveys of manufacturing, services and construction show continued expansion at the start of the year.
Economists in a Bloomberg survey forecast growth of 2.6 percent this year. Against that, waning inflation may give the central bank scope to delay tightening, with consumer-price growth slowing to the BOE’s 2 percent target for the first time in more than four years in December.
GDP is also 1.3 percent below its pre-recession peak in early 2008. Carney has cited weakness in the euro-area economy, high debt levels and the threat to exports from the pound’s strength as reasons to keep policy loose.
Next Phase
On Feb. 12, the Bank of England publishes its quarterly Inflation Report, giving Carney an opportunity to explain what the next phase of guidance might look like.
Economists say options include lowering the threshold or using Federal Reserve-style language to indicate that rates can remain on hold well after unemployment drops below 7 percent.
Some economists including Ashley at RBC flag the possibility that the MPC may publish a statement giving more detail on their thinking alongside its policy decisions today.
“It is unclear whether any putative change will be unveiled simultaneously” with today’s announcement, “or alternatively at next week’s Inflation Report press conference,” he said.
“So although we are not expecting anything from the MPC, it pays to watch closely lest there is a formal substantive statement.”
bloomberg.com
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