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Bank of England boss Mark Carney sidesteps City to ease rate rise fears Bank of England boss Mark Carney sidesteps City to ease rate rise fears
(21 days later)
The Bank of England governor, Mark Carney, will attempt to shore up his flagship "forward guidance" policy on Wednesday amid signs it is not having the desired effect on the City.The Bank of England governor, Mark Carney, will attempt to shore up his flagship "forward guidance" policy on Wednesday amid signs it is not having the desired effect on the City.
The guidance, set out earlier this month, was intended to signal that interest rates would remain at their historic low of 0.5% for years to come, and quell market fears that burgeoning economic growth would see them rise sooner.The guidance, set out earlier this month, was intended to signal that interest rates would remain at their historic low of 0.5% for years to come, and quell market fears that burgeoning economic growth would see them rise sooner.
Unfortunately for the new governor, traders were soon picking apart a series of caveats to the announcement which prompted fears that rates might rise sooner than expected – and sending bond yields up.Unfortunately for the new governor, traders were soon picking apart a series of caveats to the announcement which prompted fears that rates might rise sooner than expected – and sending bond yields up.
It means that just weeks after unveiling the unprecedented shift in Bank policy, Carney is travelling away from the Square Mile to underline the commitment of policymakers to nursing the economy back to health, in his first UK public speech.It means that just weeks after unveiling the unprecedented shift in Bank policy, Carney is travelling away from the Square Mile to underline the commitment of policymakers to nursing the economy back to health, in his first UK public speech.
The address to regional business leaders in Nottingham is being billed as an attempt to go over the heads of City analysts and talk directly to the decision makers in the real economy about what forward guidance means.The address to regional business leaders in Nottingham is being billed as an attempt to go over the heads of City analysts and talk directly to the decision makers in the real economy about what forward guidance means.
Carney is expected to reiterate the low-interest commitment in an attempt to persuade them that conditions are right to start spending cash hoarded up during the downturn and end an investment drought acting as a restraint on growth.Carney is expected to reiterate the low-interest commitment in an attempt to persuade them that conditions are right to start spending cash hoarded up during the downturn and end an investment drought acting as a restraint on growth.
But he will also undoubtedly want his words to resound back in London where interest rates determined by the market help set the borrowing costs ultimately faced by those same businesses.But he will also undoubtedly want his words to resound back in London where interest rates determined by the market help set the borrowing costs ultimately faced by those same businesses.
Meanwhile, the governor is expected to defend the Bank's tough rules on leverage ratios for lenders amid robust criticism from the business secretary, Vince Cable, last month.Meanwhile, the governor is expected to defend the Bank's tough rules on leverage ratios for lenders amid robust criticism from the business secretary, Vince Cable, last month.
Cable stoked tension with policymakers by comparing them with the Taliban over restrictions on the level of capital lenders must hold to protect against future financial shocks – and claiming the rules deter small business lending and hold back recovery.Cable stoked tension with policymakers by comparing them with the Taliban over restrictions on the level of capital lenders must hold to protect against future financial shocks – and claiming the rules deter small business lending and hold back recovery.
Carney has already defended the rules but any new intervention will be timely amid a terse denial from the Bank that a decision by Nationwide to hold off a launch of small business lending was due to the demands.Carney has already defended the rules but any new intervention will be timely amid a terse denial from the Bank that a decision by Nationwide to hold off a launch of small business lending was due to the demands.
But it is the reaction in the City to forward guidance that provides the first real challenge for the Canadian since he took over at Threadneedle Street at the start of last month – hailed as a "rock star" central banker and an activist on monetary policy.But it is the reaction in the City to forward guidance that provides the first real challenge for the Canadian since he took over at Threadneedle Street at the start of last month – hailed as a "rock star" central banker and an activist on monetary policy.
He had an immediate impact after the first Bank rates meeting under his stewardship when a statement from the monetary policy committee (MPC) giving a hint that rates would stay low for some time to come prompted a stock market surge.He had an immediate impact after the first Bank rates meeting under his stewardship when a statement from the monetary policy committee (MPC) giving a hint that rates would stay low for some time to come prompted a stock market surge.
But cracks began to show within the MPC on discussion of the guidance policy when some members voiced concern about the risks from soaring inflation that might be posed.But cracks began to show within the MPC on discussion of the guidance policy when some members voiced concern about the risks from soaring inflation that might be posed.
The committee eventually agreed by an 8-1 majority that rates would not go above their current level until unemployment had fallen to 7% – with the figure currently 7.8%. But a series of caveats were built into the policy.The committee eventually agreed by an 8-1 majority that rates would not go above their current level until unemployment had fallen to 7% – with the figure currently 7.8%. But a series of caveats were built into the policy.
These "knockouts" included a get-out clause if policymakers were to fear inflation reaching 2.5% or higher in the 18 to 24 months ahead – taking the City by surprise.These "knockouts" included a get-out clause if policymakers were to fear inflation reaching 2.5% or higher in the 18 to 24 months ahead – taking the City by surprise.
It meant that while forecasts for unemployment suggested rates would not rise until at least 2016, the market brought forward its expectations for a change to the middle of this year.It meant that while forecasts for unemployment suggested rates would not rise until at least 2016, the market brought forward its expectations for a change to the middle of this year.
Markets fell and yields on government bonds rose – the exact opposite of the effect Carney would have wanted.Markets fell and yields on government bonds rose – the exact opposite of the effect Carney would have wanted.
Economists at Investec said the guidance had not had the desired effect on markets "with the first rate hike now priced in earlier than it was pre-guidance".Economists at Investec said the guidance had not had the desired effect on markets "with the first rate hike now priced in earlier than it was pre-guidance".
"Hence we suspect the governor will mount a defence on the forward guidance, whilst trying not to say much more than he did when it was unveiled, in the absence of a stronger mandate to do so from his committee just yet.""Hence we suspect the governor will mount a defence on the forward guidance, whilst trying not to say much more than he did when it was unveiled, in the absence of a stronger mandate to do so from his committee just yet."
Allan Monks of JP Morgan said last week's upward revision of second-quarter growth to 0.7% could make it even harder to convince the City that rates would not rise for the next three years.Allan Monks of JP Morgan said last week's upward revision of second-quarter growth to 0.7% could make it even harder to convince the City that rates would not rise for the next three years.
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