Mark Carney debuts with clear signal Bank of England will not raise rates soon
FTSE 100 surges, sterling plunges within seconds of announcement; ECB echoes with first ever forward guidance for markets
Friday 05 July 2013
Mark Carney, the new Governor of the Bank of England, kicked off his Threadneedle Street revolution yesterday by effectively ruling out interest rate rises for years to come, hitting the pound but sending the FTSE 100 surging 3 per cent.
The European Central Bank (ECB) also unveiled forward guidance for the first time to help the recession-hit eurozone economy. The bank's president, Mario Draghi, said interest rates would be held at the same – or even lower – level "for an extended period of time".
The noon news instantly sent stock markets across Europe climbing higher as investors welcomed the prospect of extended central bank support for growth. The pound sank nearly two cents against the dollar and government gilt yields fell as experts said the Bank of England was more likely to restart quantitative easing despite stronger recent signs from the UK economy.
The FTSE 100 had neared 13-year highs in May before a sell-off sparked by comments from the US Federal Reserve. It climbed 191.8 points to 6,421.67 yesterday, the biggest one-day gain since November 2011.
Mr Carney was chairing his first meeting of the Bank's Monetary Policy Committee (MPC), which held interest rates unchanged at 0.5 per cent and made no changes to its £375bn money-printing programme. But rate-setters issued a rare statement to signal that the sell-off had gone too far.
Signals that the US was ready to ease the pace of its own money-printing efforts and the resultant bond market rout had pushed up the UK's long-term interest rates to the extent that financial markets were pricing in a rate hike from the Bank of England as early as mid-2015. This is months ahead of the forecasts in the Bank's May inflation report, when a move on rates was not expected until early 2016.
The MPC stressed "the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy". This is a clear hint that policymakers are ready to intervene if necessary to keep a lid on gilt yields despite inflation well above the MPC's 2 per cent target at 2.7 per cent.
Experts said the statement underlined the new Governor's dovish credentials as the Bank readies itself to introduce forward guidance on interest rates at next month's policy meeting.
George Buckley, chief UK economist at Deutsche Bank, said: "Taken at face value, it suggests that the Bank does not want to raise rates for at least the next two years, and probably somewhat longer."
The Royal Bank of Scotland economist Ross Walker added: "The Treasury wants 'monetary activism', has written this objective into the MPC's remit, and has hired Mark Carney to implement it. Mark Carney will not have disappointed the Chancellor, using his first opportunity to send out an unambiguously dovish policy signal."
In Frankfurt the news was even more dramatic as Mr Draghi battles against record unemployment in the eurozone, which has suffered six successive quarters of economic decline. The ECB's use of forward guidance is the latest weapon employed by Mr Draghi after cutting interest rates to a record low 0.5 per cent, pumping banks with cheap three-year loans, and offering to buy up the debt of eurozone strugglers if necessary.
The ING Bank economist Carsten Brzeski said: "What was expected to be a rather dull meeting turned out to be historic. With forward guidance for the first time and further rate cuts in sight, the ECB tries 'whatever it takes' to safeguard the eurozone's fragile recovery."
Shares across Europe soared on the ECB announcement. France's CAC40 gained 2.7 per cent and Germany's Dax 2 per cent. Spain and Portugal's main bourses also added 3 per cent.
What was said... and what was meant
The Bank came closer than ever to giving forward guidance – if you could translate the language …
* 12-month CPI inflation rose to 2.7 per cent in May and is set to rise further in the near term. Further out inflation should fall back towards the 2 per cent target
"We know inflation's going to be high for a while but we're not too fussed: right now it's the economy as a whole that's worrying us"
* The implied rise in the expected future path of Bank Rate was not warranted by the recent development in the domestic economy
"The market's got it wrong. Stop selling gilts because if yields go too high we're perfectly willing to turn on the QE again to bring them down. Hedge funds, you have been warned!"
* The Chancellor… requested we provide an assessment of the case for adopting some form of forward guidance… This analysis would have an important bearing on the committee's policy decisions in August.
"Clearly, we've already decided that we're going to start doing forward guidance from August"
* Market rates have risen sharply and asset prices have been volatile
"Thanks to Mr Bernanke …"
* The committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report...
"Can everybody please stop getting carried away with the better data. We know things have picked up lately but there is still a long way to go"
* A degree of slack (in the economy) is expected for some time
"We haven't changed our mind on the output gap, and we still think we can stimulate the economy without pushing up on inflation. Don't forget we're still 4 per cent below the UK's pre-recession peak"
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