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Mark Carney may have to relaunch QE to keep down interest rates
The Bank of England is expected to take further action to ensure interest rates remain low after last week’s pledge failed to sway the market.
The Bank’s guidance two weeks ago, when it signalled that rates would be at their record 0.5pc low for three more years, was a radical change of policy. The MPC’s hands will now be tied on when to raise rates until unemployment falls to 7pc or one of the three “knockouts” is breached.
By Philip Aldrick, Economics editor
8:30PM BST 14 Aug 2013
Top economists said the Monetary Policy Committee (MPC) could relaunch quantitative easing (QE) within months if markets did not move into line with the “forward guidance” unveiled by Governor Mark Carney last week.
The warning came after another rise in both sterling and government borrowing costs, and as traders brought forward their forecasts for a first rate rise to the third quarter of 2015 – roughly a year earlier than the Bank has signalled.
It followed publication of the minutes to this month’s MPC meeting, which revealed a split among the nine members over their landmark commitment to keep rates on hold at 0.5pc until unemployment drops to 7pc.
Martin Weale, an external member, backed the core proposal of “forward guidance” but wanted to strengthen one of three “knockouts” that can over-rule the unemployment target and force the committee to consider early rate rises.
Bank hawk Martin Weale voted for a 0.25pc interest rate hike for seven consecutive months in 2011 (Photo: Marina Imperi)
Alan Clarke, UK economist at Scotiabank, said markets had been “distracted” by the split after sterling edged up 0.43pc against the dollar to $1.5515 and the two-year gilt rose 1.6 basis points to 0.426pc. Unemployment figures also published yesterday showed that the 7pc target remains a distant prospect. The official measure remained unchanged at 7.8pc for the three months to June.
Since the Bank unveiled its new unemployment threshold and signalled that it did not forsee any rate rises until the second half of 2016, markets have surprisingly ignored the guidance.
Mr Clarke said: “The Bank issued forward guidance to nurture the recovery. If the market undermines it, I don’t think they’ll hesitate to send more smoke signals out at the very least, or flex their muscles and do more QE. If the Governor moves, he’ll probably bring several of the committee with him.”
Kevin Daly, UK economist at Goldman Sachs, added: “ We expect that the MPC will want to reverse this move, first with stronger communication and, if this doesn’t work, potentially with additional policy action.”
The minutes showed that QE remains on the table, even though Paul Fisher and David Miles have not voted to increase the £375bn programme by £25bn for two months now. They have decided to “gauge the impact” of forward guidance “before reconsidering an increase”.
As Governor of the Bank of Canada, Mr Carney underpinned his one-year commitment to low rates by intervening in the markets. He described it later by saying: “We put our money where our mouth is.” The Bank is thought to be waiting to see if markets fall in to line with its guidance after summer to decide whether it needs to act in the UK.
The minutes said guidance “should reduce the risk of an unwarranted rise in market interest rates that prematurely tightened financial conditions”.
Mr Weale objected to the MPC pledge to drop the unemployment commitment if inflation was forecast to overshoot the Bank’s central 2pc target by half a percentage point over “18 to 24 months”. Instead, he wanted the over-rule to kick in earlier to prevent any risk the new policy would allow prices to spiral out of control.
However, he said he would ignore his objection and “form his future judgements ... in line with the framework adopted by the committee”.
Separately, the Bank was warned by its agents round the country that the Government’s subsidised mortgage scheme was driving up house prices
The Bank of England is expected to take further action to ensure interest rates remain low after last week’s pledge failed to sway the market.
The Bank’s guidance two weeks ago, when it signalled that rates would be at their record 0.5pc low for three more years, was a radical change of policy. The MPC’s hands will now be tied on when to raise rates until unemployment falls to 7pc or one of the three “knockouts” is breached. By Philip Aldrick, Economics editor
8:30PM BST 14 Aug 2013
Top economists said the Monetary Policy Committee (MPC) could relaunch quantitative easing (QE) within months if markets did not move into line with the “forward guidance” unveiled by Governor Mark Carney last week.
The warning came after another rise in both sterling and government borrowing costs, and as traders brought forward their forecasts for a first rate rise to the third quarter of 2015 – roughly a year earlier than the Bank has signalled.
It followed publication of the minutes to this month’s MPC meeting, which revealed a split among the nine members over their landmark commitment to keep rates on hold at 0.5pc until unemployment drops to 7pc.
Martin Weale, an external member, backed the core proposal of “forward guidance” but wanted to strengthen one of three “knockouts” that can over-rule the unemployment target and force the committee to consider early rate rises.
Bank hawk Martin Weale voted for a 0.25pc interest rate hike for seven consecutive months in 2011 (Photo: Marina Imperi)
Alan Clarke, UK economist at Scotiabank, said markets had been “distracted” by the split after sterling edged up 0.43pc against the dollar to $1.5515 and the two-year gilt rose 1.6 basis points to 0.426pc. Unemployment figures also published yesterday showed that the 7pc target remains a distant prospect. The official measure remained unchanged at 7.8pc for the three months to June.
Since the Bank unveiled its new unemployment threshold and signalled that it did not forsee any rate rises until the second half of 2016, markets have surprisingly ignored the guidance.
Mr Clarke said: “The Bank issued forward guidance to nurture the recovery. If the market undermines it, I don’t think they’ll hesitate to send more smoke signals out at the very least, or flex their muscles and do more QE. If the Governor moves, he’ll probably bring several of the committee with him.”
Kevin Daly, UK economist at Goldman Sachs, added: “ We expect that the MPC will want to reverse this move, first with stronger communication and, if this doesn’t work, potentially with additional policy action.”
The minutes showed that QE remains on the table, even though Paul Fisher and David Miles have not voted to increase the £375bn programme by £25bn for two months now. They have decided to “gauge the impact” of forward guidance “before reconsidering an increase”.
As Governor of the Bank of Canada, Mr Carney underpinned his one-year commitment to low rates by intervening in the markets. He described it later by saying: “We put our money where our mouth is.” The Bank is thought to be waiting to see if markets fall in to line with its guidance after summer to decide whether it needs to act in the UK.
The minutes said guidance “should reduce the risk of an unwarranted rise in market interest rates that prematurely tightened financial conditions”.
Mr Weale objected to the MPC pledge to drop the unemployment commitment if inflation was forecast to overshoot the Bank’s central 2pc target by half a percentage point over “18 to 24 months”. Instead, he wanted the over-rule to kick in earlier to prevent any risk the new policy would allow prices to spiral out of control.
However, he said he would ignore his objection and “form his future judgements ... in line with the framework adopted by the committee”.
Separately, the Bank was warned by its agents round the country that the Government’s subsidised mortgage scheme was driving up house prices
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