Carney Takes on Markets With Shock Warning on BOE Rate View

(Bloomberg) -- Mark Carney wants investors to respond to the data when predicting U.K. interest rates. And if they don’t, the Bank of England governor is more than happy to nudge them.

That seems to be the lesson of his latest comments, when he noted recent weak economic numbers and said that policy makers are conscious there will be other chances to raise rates this year. It was enough to send the pound tumbling and prompt a sharp reappraisal by investors on a May hike, which many had considered a sure thing.

The intervention followed weaker-than-forecast inflation data, a drop in retail sales and mixed labor-market figures. While that may give some policy makers pause for thought, the problem for Carney is the reputation for whiplashing that’s hung over him for years. Now, whether the BOE hikes on May 10 or not, investors will have scope to complain about communication.

“It was bit strange,” James Athey, senior investment manager at Aberdeen Asset Management, told Bloomberg Television. “I would argue that once everyone is positioned for the hike, the best thing to do is just see how the data pans out and the market will unwind it if the data isn’t good enough.”

But Carney may not have had faith in the market’s capacity to shift expectations appropriately on new information.

While pricing on a hike had drifted lower after the inflation numbers, it was still above 80 percent when he spoke. The comments, in a BBC interview in Washington, pulled that down to 50 percent. Expectations for another increase in November, which had already fallen after the weak data, dropped further.

On Friday, MPC member Michael Saunders stuck to his guns on the need for tighter policy after voting to increase the benchmark rate in March. He said capacity pressures are rising and the economy is growing above potential, adding that the slowdown in the first quarter is “questionable.”

Read more: Saunders makes the case for rate hike

The pound extended its declines on Friday, sliding to a two-week low.

“It’s a clear acknowledgement by Carney that’s there’s been a deterioration in the data,” said Vasileios Gkionakis, co-head of strategy research at Unicredit. “In terms of sterling, the risks are skewed to the downside, because the markets over the past couple of months have really jumped the gun, they’ve priced in a lot of aggressiveness in terms of BOE policy.”

A lawmaker dubbed Carney an “unreliable boyfriend” in 2014 for flip flopping on the outlook for monetary policy.

While the BOE never said it was going to move in May, policy makers opted not to quash expectations. Their key line this year has been that tightening could happen faster than previously anticipated. That set investors looking at May as an option, something the bank hadn’t -- at least until Thursday -- explicitly pushed against.

The next key release will be first-quarter gross domestic product on April 27. The BOE expects 0.3 percent growth, having cut its estimate last month because of disruptive snowstorms during the period. That would be down from a 0.4 percent pace at the end of 2017, and the question is how much the BOE looks through the weather-related volatility.

In the interview, Carney said the MPC will look at things “in the round.” But the wobble may be enough to sow doubt among some officials about tightening as soon as May. The governor said policy makers will make their decision “conscious that there are other meetings” this year.

--With assistance from Anna Edwards Mark Barton Ven Ram David Goodman and Jill Ward

To contact the reporter on this story: Fergal O'Brien in London at fobrien@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Lucy Meakin

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