Carney hits obstacles
Britain greets Fed-style thresholds with skepticism,
LONDON Bank of England governor Mark Carney’s campaign to restrain interest-rate expectations is already running into skepticism.
Yields on gilts — bonds issued by the U.K. government — rose to the highest in more than a month after Carney took the unprecedented step of saying the bank probably won’t raise its benchmark from a recordlow 0.5 per cent until unemployment falls to seven per cent.
While policy-makers don’t expect that to occur before the third quarter of 2016, investors bet faster inflation will force them to act sooner.
“Markets have taken the view that the inflation conditionality that can suspend the bank’s forward guidance dilutes the effectiveness of the pre-commitment to keeping rates low for longer,” said Lena Komileva, chief economist at G+ Economics in London.
The reaction highlights the challenge Carney faces in introducing Federal Reserve-style policy thresholds as the U.K. economy strengthens and leaves him the latest international central banker at odds with financial markets.
Economists from Nomura International PLC to Deutsche Bank AG are among those to forecast interest rates will be increased in 2015.
The pound rose as much as 1.2 per cent to $1.5531 US, the highest in almost seven weeks, and closed at $1.5513 US Wednesday in London.
The yield on the 10-year gilt increased to 2.56 per cent, the most since June 25, before easing to 2.48 per cent.
The rate on three-month sterling futures maturing in September 2016 rose seven basis points to 1.87 per cent.
Investors were responding to an overhaul of communications at the BOE just over a month since former Bank of Canada Governor Carney took the reins pledging to be innovative in acting to speed up the weakest U.K. recovery on record.
Carney’s aim is to reduce uncertainty about the policy path as the economy rallies, supporting the revival by persuading investors to reverse recent gains in market rates he calls “unwarranted” and encouraging consumers and companies to spend.
Under a plan that echoes one introduced by the Fed in December, the BOE said joblessness must fall from 7.8 per cent to seven per cent for a rate hike to be considered. It forecast that’s unlikely to happen for three years and will require the addition of 750,000 new jobs.