Mark Carney’s plan to guide investors on the future cost of borrowing risks being drowned out by Britain’s strengthening economic recovery. The Bank of England governor will present a review tomorrow on implementing forward guidance in the UK as improving economic data boosts the future cost of money.
He has already taken steps to curb higher borrowing costs, saying last month that the “implied rise in the expected future path of bank rate was not warranted” by economic developments.
But Mr Carney faces a struggle to keep investors’ expectations in check after indexes of services, manufacturing and construction exceeded economists’ forecasts last month, pushing two-year gilt yields to the highest in two weeks relative to equivalent German notes yesterday. Deutsche Bank said the figures are now at a level where the Bank of England has previously tightened policy.
In addition to the industry surveys, a revival in the housing market and improving consumer confidence are providing signs of a UK recovery after economic growth accelerated to 0.6 per cent in the second quarter.
Mr Carney will publish the quarterly inflation report at a press conference in London this morning, his first since becoming Bank of England governor. Alongside the new forecasts, he will release a review of forward guidance requested by the government and a view of the trade-off between growth and inflation.
"The problem is that the economy is improving," said Steve Barrow, head of Group-of-10 research at Standard Bank in London. "For all the bank might end up doing is fighting the market, not guiding it."
Comments by European Central Bank president Mario Draghi last week suggest Mr Carney may need to be more specific in his guidance. Mr Draghi echoed the Bank of England governor when he said on August 1st that expectations of a rate increase in the euro area are "unwarranted". He also reiterated last month's guidance that all key ECB rates will stay at current levels or lower for an "extended period of time", without specifying that period.
Austin Hughes, chief economist at KBC Bank Ireland in Dublin, said the ECB's guidance is a "work in progress".
“The entire range of implications of this course of action may not have been completely thought through,” Mr Hughes said. – Bloomberg
