Bank of England 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.
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 voted for a rate rise and
economists were confident an MPC majority would back a rise to 0.75
percent in May.
This all changed on Thursday 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 percent from 65 percent.
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 percent.
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 will probably be more important for the BoE’s May decision
than the weather-affected preliminary first-quarter gross domestic
product figures on Friday, 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 percent, and a record proportion of Britons are in work.
Komileva said she saw little case to delay a rate rise.
The BoE’s signals on rates felt more arbitrary than those of the U.S. Federal Reserve or the European Central Bank, she said.
Fed policymakers make individual projections for rates while ECB 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.
Just two months ago, Carney had said he
felt he could stop giving hints on rates because markets understood the
BoE’s thinking well enough to draw their own conclusions.
After
that, Brexit worries eased as Britain secured an outline Brexit
transition deal until the end of 2020, and economists said signs of
economic weakness were the result of freak snow storms, adding to the
sense that another rate hike was coming.
The missing piece of the picture for the BoE is wage growth, the key
factor for inflation pressure. At an annual 2.8 percent, wage growth is
roughly in line with BoE expectations but remains weak by historic
standards, especially given low unemployment.
Former BoE
policymaker David Blanchflower thinks the central bank should hold off
raising rates and look harder at the number of people in part-time work
but who want to work longer hours, suggesting wages are unlikely to pick
up sharply.
The BoE might feel it has more time to see if wages
rise after a bigger-than-expected fall in inflation in March.
Furthermore, sterling’s recent recovery should curb inflation pressures.
Even Michael Saunders - who voted for a rate rise last month and
looks set to do so again - has said the muted response of wages to the
fall in unemployment defied simple formulae.
For now, economists are still trying to gauge whether Carney’s comments were a warning that rates are unlikely to rise in May.
Alan
Clarke at Scotiabank, who has dropped his forecast of a May rate rise,
said they were probably intended to stop MPC members feeling they were
committed to a hike next month.
Komileva said they might have
the effect of dissuading wavering MPC members from backing a rate rise
for fear of wrong-footing markets again.
But HSBC
economists Simon Wells and Elizabeth Martins - who for now are holding
with their view of a May rate rise - said they would take the comments
with a grain of salt.
