Mark Carney, governor of the Bank of England, smiles during a discussion at the Public Policy Forum Canada Growth Summit 3 in Toronto, Ontario, Canada. (Photographer: Cole Burston/Bloomberg)

Carney Hits Back on BOE Messaging After Swings in Rate-Hike Bets

(Bloomberg) -- Mark Carney told financial markets they aren’t his only audience as he defended himself against fresh accusations of poorly communicated monetary policy.

The Bank of England governor was inundated with questions by reporters on Thursday on why the central bank resisted the hike in interest rates that it had seemed only recently to signal. Carney said what matters most is that the wider public still understands borrowing costs are headed gradually higher.

“The view of households that we talk to, that are surveyed, the view of businesses, is that they expect interest rates to go up at some point over the course of the next year,” he said. “They’re not fixated on whether we raise interest rates on May 10, or at the end of June, or in August.”

The governor, speaking on the day the BOE kept its key rate on hold, had to answer questions on his communication for more than half his hour-long press conference. That reflects the latest example in his five years in office of signposted policy shifts that never materialized.

In March, the BOE noted that markets were pricing in a May rate hike and didn’t push back. In April, Carney suddenly intervened to say there were “other meetings” when an increase might come. The forecasts on Thursday showing inflation weakening faster than anticipated pushed market expectations for tightening this year below 100 percent.

In all, money markets have shifted since February between pricing as many as two rate hikes this year to none at all.

What Our Economists Say

“The MPC conditioned its forecasts on a curve that assumes three rate hikes over three years, with the next one coming in November, and there was also no effort to lean against that. For us, that suggests the committee stands ready to lift interest rates this year.”
--Dan Hanson, Jamie Murray and Niraj Shah, Bloomberg Economics

Richard Barwell, head of macro research at BNP Paribas Asset Management UK Ltd., said he doubts Carney’s contention that he’s speaking mainly to the wider public.

“Arguing that the transmission mechanism works primarily through household expectations of the path for bank rate, rather than the rates they observe on credit cards and mortgages -- which in turn hinge on the yield curve -- is unorthodox to put it mildly,” he said. “It’s heroic to assume the central bank has much influence on those expectations.”

The perceived flip-flopping earned Carney the moniker "unreliable boyfriend" from one politician in 2014. The governor told journalists that the only other people who use the term are “in this room.”

The counter-argument goes that the governor’s aim isn’t to make promises but to provide insight into how policy makers interpret statistics. Traders who heeded him in April were saved a costly error when reports showed the U.K. barely expanded in the first quarter.

Not Unreliable

“Can we all please drop the ‘unreliable boyfriend’ line?” said Alan Clarke, head of European fixed income strategy at Scotiabank Europe Plc. “The data disappointed, so they didn’t hike. The end. That’s it! What is unreliable about that?”

Marc Ostwald, a strategist at ADM Investor Services, said in emailed comments that “hopefully financial markets will take a rather more skeptical, or at least critical view of policy maker pronouncements, rather than sticking to the rather slavish or Pavlovian reaction function that has been on display since the turn of the year.”

Carney’s signature policy when he headed the Bank of Canada was forward guidance. When he brought that to the BOE in 2013, he quickly ran into problems. Having pledged to consider a rate increase as soon as unemployment fell below a certain threshold, he found joblessness fell faster than expected.

In 2015, his assertion that the decision on when to increase the benchmark would come into “sharper relief” at the turn of the year failed to lead to action -- though Carney never promised it would. The following year, a signaled second cut after the Brexit vote didn’t pan out.

Lesson Time

This time around, the BOE shouldn’t have let markets reach a point where a May rate increase was seen as nailed on, according to David Blanchflower, who sat on the BOE’s rate setting committee from 2006-2009.

“There was zero in the data to sustain it at the time and the danger was the data would worsen, as it did,” he said. “The forward guidance stuff was horrible previously and I would have thought they would have learned.”

Carney’s latest message is that companies and households expect rates to rise, and that they’re probably right. In the meantime, he said, the BOE has “some flexibility” on the timing.

“While the message from the BOE in this report feels vague and confusing, our read is that the MPC is signaling that it still sees a rate hike as likely in the second half -- while not offering any real clues as to whether that will be August or November,” said Allan Monks, an economist at JPMorgan in London. “This report wasn’t a great advert for clarity in central bank communication.”

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