In Mark Carney’s first policy speech, he put to bed worries about the MPC’s willingness to ensure the interest rate remains at 0.5%. The outlook on the UK economy has been looking increasingly positive, resulting in speculation that the unemployment rate will fall to 7% faster than the central bank is predicting and consequently push interest rates higher. In his speech to business leaders today, Carney said if interest rates tighten due to rising expectations “and the recovery seems to be falling short of the strong recovery we growth we need, we will consider carefully whether, and how best, to stimulate the recovery further.” He also reiterated that “Our forward guidance was clear that, although we would not reduce the stimulus until the recovery is secure, we would if necessary provide more”.
BoE Governor Carney’s objective has been achieved. Confidence that the central bank will aim to keep the interest rates low has been restored. Misinterpretation of earlier forward guidance comments gave the perception that the future of interest rates was solely dependent upon the unemployment rate. In his speech today, the Governor also cleared up that confusion and said “We are giving confidence that interest rates won’t go up until jobs, incomes and spending are recovering at a sustainable pace.” He noted that “Guidance provides you with certainty that interest rates will not rise too soon. Exactly how long they will stay low depends on the progress of the economy.” This highlighted that the bank has a potential strategy in place in case rate pressure continues. Using extra stimulus to support growth shows the central bank is not willing to compromise the strength of the recovery, and achieving healthy growth is a huge priority for the central bank as well as price stability.
As for convincing the markets that the committee has a plan in place, the Governor’s speech looks to have done the job. If price pressure unexpectedly gets out of hand however, the MPC may have to rethink their back up move of increasing stimulus.
Sasha Nugent,
Currency Analyst
Caxton FX
