Carney’s BOE rates guidance stumbles on investor skepticism

Knockout Questions

It was those so-called “knockouts” that investors focused on as they questioned the strength of commitment by suggesting inflation concerns may prove too much for the bank to bear. The BOE currently predicts consumer-price growth will slow to its 2% target in the fourth quarter of 2015 from 2.9% in June. It has been above the goal since 2009.

The MPC has “gone out of its way to avoid having its hands tied,” said Victoria Clarke, an economist at Investec Securities in London. “These clauses look to have been unhelpful for the credibility of the new guidance.”

Clarke added that, given signs of a faster economic recovery, unemployment could drop below 7% as soon as the end of 2015. Indexes of services, manufacturing and construction all exceeded economists’ forecasts last month, signaling continued momentum in the economy after 0.6% growth in the second quarter.

Jens Larsen, chief European economist at RBC Capital Markets in London, revised his forecast to show the BOE raising its key rate in the third quarter of 2016, a year later than he previously expected. Citigroup Inc. economist Michael Saunders said the central bank won’t hike before 2017.

Partial Shift

Deutsche Bank AG’s George Buckley said the curbs on the thresholds may not prove binding, noting the bank has never forecast inflation above 2.5% in two years’ time even when it breached 5%. The two other controls are open to wide interpretation and judgement calls, he said.

Still, he refused to adjust his forecast to fully reflect Carney’s direction that policy will remain on hold for another three years, pushing back his call to 2015 from 2014.

“The bank may feel very different about the need to tighten policy in the future,” he said. “While we need to put back our forecast for the rise in interest rates on account of today’s message from the bank, we do not see it being as late as 2016-2017.”

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