Bank of England Governor Mark Carney’s campaign to restrain interest-rate expectations is already running into skepticism.
Gilt yields rose to the highest in more than a month after Carney took the unprecedented step of saying the bank probably won’t raise its benchmark from a record-low 0.5% until unemployment falls to 7%. While policy makers don’t expect that to occur before the third quarter of 2016, investors bet faster inflation will force them to act sooner.
“Markets have taken the view that the inflation conditionality that can suspend the bank’s forward guidance dilutes the effectiveness of the pre-commitment to keeping rates low for longer,” said Lena Komileva, chief economist at G+ Economics in London.
The reaction highlights the challenge Carney faces in introducing Federal Reserve-style policy thresholds as the U.K. economy strengthens and leaves him the latest international central banker at odds with financial markets. Economists from Nomura International Plc to Deutsche Bank AG are among those to forecast interest rates will be increased in 2015.
The pound rose as much as 1.2% to $1.5531, the highest in almost seven weeks, and traded at $1.5513 as of 4:03 p.m. in London. The yield on the 10-year gilt increased to 2.56%, the most since June 25, before easing to 2.48%. The rate on three-month sterling futures maturing in September 2016 rose 7 basis points to 1.87%.
Investors were responding to an overhaul of communications at the BOE just over a month since former Bank of Canada Governor Carney took the reins pledging to be innovative in acting to speed up the weakest U.K. recovery on record.
Carney’s aim is to reduce uncertainty about the policy path as the economy rallies, supporting the revival by persuading investors to reverse recent gains in market rates he calls “unwarranted” and encouraging consumers and companies to spend.
Under a plan which echoes one introduced by the Fed in December, the BOE said joblessness must fall from 7.8% to 7% for a rate hike to be considered. It forecast that’s unlikely to happen for three years and will require the addition of 750,000 new jobs.
The Monetary Policy Committee’s commitment is voided if policy makers decide medium-term inflation is likely to breach 2.5%, price expectations are no longer well-anchored or if financial stability is viewed at risk.