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Bank of England's Mark Carney wrong-foots investors again

Coming from a policymaker who championed predictability when he arrived in London a year ago, his apparently alternating signals on interest rates have left many investors perplexed. In June, he made sterling leap by warning investors that they were not sufficiently pricing in the chance of an early increase in Britain's record-low benchmark interest rates. Two months on, Carney has sent the pound tumbling towards its biggest daily fall in six months by seemingly pushing back the prospect of a rate hike this year. Analysts at Citigroup called Carney a "policy chameleon" after he caught markets by surprise on Wednesday by emphasising the importance of pay and labour costs in the Bank's thinking on when to raise rates while at the same time announcing a halving of the BoE's wage growth forecasts. "Sterling is clearly disappointed by Carney's moving of the goalposts yet again," said Geoffrey Yu, a currency strategist at UBS, as the pound sank to a four-month low against the dollar. In June, a member of Britain's parliament hit the headlines when he likened Carney to an "unreliable boyfriend" for blowing hot and cold over when interest rates might rise.

"I would say he is more like a fearful fiancé. He has popped the question, i.e. put the prospect of a rate hike out there, but is yet to commit to a date for the big day," said Kathleen Brooks, research director at, on Wednesday.

To be sure, the Bank of England is stressing that the guidance that really matters for the economy is its plan to raise rates only gradually when the time comes, and to a lower level than before the financial crisis.

Carney on Wednesday was dismissive of the speculation about the exact timing of the first increase, saying it only mattered to investors gambling on interest rate futures.

Also in the BoE's defence are the huge uncertainties about whether Britain's fast-recovering economy is at risk of overheating.

Unemployment has plunged far faster over the past year than forecasters expected.

On the other hand, since Carney warned markets in June against being too relaxed about when rates might rise, wage growth has stagnated and even fell in the second quarter.


Those mixed signals from the labour market leave open the starkly contrasting possibilities that inflationary increases in pay are approaching, or that Britain's economic recovery remains fragile despite its recent momentum.

"Of course the data has moved about and the BoE has to respond, but their message seems to change a lot from month to month and that makes it hard to figure out how much weight to put on it," said Rob Wood at Berenberg bank in London.

Samuel Tombs, at Capital Economics, said he was taking Carney's latest comments with a pinch of salt too.

"The recent variability of the governor's tone – recall he was trying to talk up rate expectations in June – means we are reluctant to read too much into his dovish noises," Tombs said, adding the chances of a 2014 rate hike remained finely balanced.

Next week's publication of the minutes of the BoE's August policy meeting might show at least one policymaker cast a first vote in favour of a rate hike, potentially putting markets back on alert about a tightening of policy this year by the BoE.

Whichever way the economic data and the policy debate develop, there will be no return to the lull in markets that marked much of the first year of Carney's term at the BoE.

Soon after arriving from Canada in July 2013, he moved to douse any early expectations of a rate hike by introducing a 'forward guidance' policy. The BoE first ruled out any consideration of a hike until unemployment fell to 7 percent. After that happened far more quickly than forecast, the Bank tied rates to a broad assessment of spare capacity.


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