After Carney surprise, chance of May BoE rate hike down but not out

LONDON: Bank of England (BoE) governor Mark Carney surprised investors last week when he hinted that interest rates might not go up next month – but economists say it would be wrong to rule out an increase.

“Forward guidance” about central bank policy intentions was Carney’s signature policy when he arrived at the BoE from Canada in 2013. Yet even now, as he nears the end of his British sojourn, financial markets are still trying to figure him out.

“The BoE has been behaving like the Grand Old Duke of York,” said Lena Komileva, managing director of G+ Economics, likening Carney to the commander mocked in a British nursery rhyme for leading troops pointlessly up and down a hill.

Since the second half of last year, the BoE has warned that Britain’s economy is at risk of persistent inflation even as the approach of its exit from the European Union causes growth to lag that of other rich nations.

The BoE raised rates in November for the first time since 2007, and in February Carney and his fellow rate-setters said interest rates might need to rise slightly faster than the bank judged that markets were expecting.

In March, two members of the BoE’s Monetary Policy Committee (MPC) voted for a rate rise and economists were confident an MPC majority would back a rise to 0.75% in May.

This all changed when Carney alluded to “mixed data”, differences of opinion on the MPC and the possibility of rate rises later in the year in a BBC interview.

Sterling tumbled by more than a cent, short-dated bond yields recorded their biggest fall this year, and financial markets chopped the odds on a May rate rise to less than 40% from 65% before, according to Thomson Reuters calculations.

Investors should not lose track of the bigger picture, said Mike Amey, a fund manager at Pimco, the world’s largest bond investor, as market pricing of the chance of a May move crept back up to around 50%.

“Whether they hike in May or not is an open question,” Amey said. “But we think the underlying momentum in the economy is holding up quite well, and therefore that in due course we will see higher rates than are currently priced in for the next couple of years.”

Pimco expects BoE rates to rise once or twice both this year and next – compared with the single rate rises in November 2018 and August 2019 factored in by markets.

April purchasing managers’ surveys from British businesses would probably be more important for the BoE’s May decision than the weather-affected preliminary first-quarter gross domestic product figures tomorrow, Amey added.

Overall, the economy has held up better than most economists expected after the June 2016 Brexit vote, despite lagging the global rebound. And the high inflation that hit consumer demand last year is slowing as sterling recoups some of its losses.

Unemployment has fallen to a 43-year low of 4.2%, and a record proportion of Britons are in work.

Komileva said she saw little case to delay a rate rise. “If the Bank were to miss May, it would create serious questions about... what it would take for them to move again,” Komileva said.

The BoE’s signals on rates felt more arbitrary than those of the US Federal Reserve or the European Central Bank, she said.

Fed policymakers make individual projections for rates while European Central Bank president Mario Draghi regularly offers hints on policy.

This is not the first time markets have been jolted by Carney. In 2013 the BoE linked policy to the jobless rate, only for unemployment to fall far faster than policymakers forecast.

And in mid-2014 and mid-2015 Carney suggested rates might rise sooner than markets expected – only to backtrack both times. — Reuters