Mark Carney may be getting ready to unsettle investors again. The Bank of England governor has an opportunity this week to address bets that he'll keep interest rates unchanged until mid-2016.
Market sentiment shifted Friday after the Conservative election victory, with traders predicting the BOE will offset tight fiscal policy by holding borrowing costs at a record low for longer. The bank will maintain the benchmark at 0.5 per cent on Monday, according to a Bloomberg survey.
The economy has grown for nine straight quarters and, while inflation is below the BOE’s target, oil prices are rising. Against that backdrop, Carney might stop short of endorsing the view that the key rate will stay unchanged for more than another year when he presents new forecasts on Wednesday. The press conference is a chance for the governor to repeat what he’s done before and tell investors they’ve gone too far.
“Our hunch is that the market is a bit too relaxed about it all at the moment,” said Victoria Clarke, an economist at Investec Securities in London. “The bank was warning in February about a risk of an inflation overshoot and we don’t see that going away. The underlying trend is still for a recovery.”
The Tory victory, in stark contrast to opinion polls that had suggested no party would command a clear majority, clears Prime Minister David Cameron’s path to continue cutting spending. His planned fiscal squeeze is more aggressive than what the opposition Labour Party had proposed as he aims to eliminate a deficit of almost 5 per cent of gross domestic product.
Purdah lifts
The publication of the Inflation Report on Wednesday gives Carney and other Monetary Policy Committee members their first chance to speak publicly in more than a month after they went into purdah during the election campaign. The central message in remarks before the silent period was that the next most likely move in rates would be an increase. Since then, data showed GDP growth eased in the first three months of the year, though surveys indicate the economy is rebounding this quarter. Sarah Hewin, an economist at Standard Chartered Bank in London, said she's waiting to see how the MPC assess the latest developments. "We'll have their latest thoughts spelled out very clearly," she said. "We're not changing our forecast now because there are a lot of moving parts at the moment."
The MPC will announce its latest policy decision at noon in London, and all 41 economists in a Bloomberg survey forecast that the rate will stay at 0.5 per cent, where it’s been since March 2009. With inflation at zero, the panel is under no immediate pressure to tighten.
Bloomberg
