The financial markets gave a confused response to Mark Carney's forward guidance plans yesterday as traders weighed up the likelihood the Bank of England's historic promise to keep monetary policy loose for three years will actually be kept.
Immediately after the plan was unveiled yesterday morning 10-year gilt yields rose 12 basis points to 2.55 per cent – representing a tightening of monetary conditions and the very opposite market reaction Mr Carney wanted as he seeks to bring down borrowing costs across the economy. Later, however, long gilt yields fell back to 2.48 per cent.
"The forward guidance contained in the Inflation Report was broadly expected but what was unexpected were the get-out clauses" Lena Komileva of the G+ Economics consultancy said. Referring to the Bank's statement that rates could rise sooner if inflation expectations get out of hand or financial stability looks in jeopardy, she said: "The Bank's pre-commitment to keeping rates at a record low is not as conclusive as it first appeared."
Alan Clarke of Scotiabank, suggested the Bank's new unemployment reduction threshold of 7 per cent could be met ahead of forecasts. "Our knee-jerk reaction is that 2016 is a rather conservative assumption" he said. "Our working assumption was that level of the unemployment rate could be reached at least a year earlier".
Sterling dropped nearly a cent against the US dollar after the Bank's guidance parameters were announced, before recovering to $1.549. The pound also yo-yoed against the euro, finally finishing up 0.75 per cent at €1.162. Mr Carney said the Bank stand ready to add to its £375bn QE programme "if further stimulus is warranted" to drive down rates.
The FTSE 100 share index, meanwhile, closed down 1.4 per cent. Traders were said to be underwhelmed by the guidance and concerned about the prospect of a tightening of monetary policy in the US.
But Mr Carney himself stressed the need to look to the longer term to judge the impact. "The move in markets is very marginal in terms of the expected rise" he told Sky News. "Different people have different views on when we're going to reach this for [7 per cent] level of unemployment".