Traders were thrown into confusion as Governor Mark Carney issued an unexpectedly dovish signal about the likely timing of the first interest rate rise.
Speaking to the Treasury Select Committee, Carney said the most recent data showing average real wages contracted again in April implied to him that the economy had more slack. “That would suggest to me that there has been more spare capacity in the labour market than previously thought,” he said.
Those comments hit sterling, with the pound rapidly sliding half a cent against the dollar to $1.6977. The rate-setting MPC has said it will lift interest rates from their present historic lows of 0.5 per cent before slack has been fully used up.
At the Mansion House this month Carney caught traders off guard by saying interest rates could rise “sooner than markets currently expect”. That hawkish intervention prompted traders to drag forward their bets for the first rate rise to the autumn, having previously expected it to come in the first quarter of 2015.
Questioned by the committee about the wisdom of his Mansion House speech the Governor, pictured, said he “absolutely” expected it to move the markets. “Really what we’re trying to do is see the markets adjust to the data. We were surprised that it hadn’t [already],” he said. “A short-term market of expectations of Bank Rate that moves around with the data is healthy.” He added that expectations could move again if the data evolve to show more slack.
David Miles, an external member of the rate-setting monetary policy committee who was also giving evidence to the committee, concurred with the Governor’s view on slack. He said there was likely to be some “hidden unemployment” among the large number of newly self-employed workers and that the level of spare capacity in the economy could be higher than the 1 per cent to 1.5 per cent of GDP that is the MPC’s consensus estimate.
In another dovish signal on rates Carney suggested the level of unemployment the economy can bear before inflation starts to pick up could be lower than the Bank expected.
The Bank’s financial policy committee will reveal on Thursday whether or not it has decided to cool the housing market. House prices rose 9.9 per cent nationwide in the year to April, but in May mortgage approvals fell to their lowest since August, according to figures today from the British Bankers’ Association.