Carney’s BOE rates guidance stumbles on investor skepticism

Unemployment Measure

The choice of unemployment as a metric revived a debate among economists as to whether it is a good proxy of economic health in the U.K. given it has fallen from a crisis high of 8.4% in 2011 even as the economic recovery proved sluggish. That drop has prompted suggestions U.K. productivity is lackluster and the economy more inflation-prone than previously.

“The BOE can say it doesn’t expect to hit 7% for such a long time, but its record on forecasting such things is easily bad enough to lack credibility,” said Philip Rush, an economist at Nomura International Plc in London. “Our forecast is for unemployment to fall much faster and thus rate hikes to come earlier.”

Data also could fail to show whether workers have been forced to accept part-time jobs and, as in the U.S., joblessness could drop because people are leaving the workforce, said Clarke at Investec.

Another doubt is whether the crisis has left a large proportion of U.K. workers unemployable, which would mean the labor market is already tight, according to Marc Ostwald, a strategist at Monument Securities.

Easily Understood

Carney defended the use of joblessness as a metric, calling it understood, widely available and not subject to revisions.

The Bank of England isn’t alone in revamping communications in a bid to boost growth at a time when interest rates are around rock-bottom and there are questions about the effectiveness of asset purchases. Fed Chairman Ben S. Bernanke introduced unemployment and inflation parameters to guide rate increases in December, while Bank of Japan Governor Haruhiko Kuroda aims to deliver 2% inflation within two years. European Central Bank President Mario Draghi has pledged to keep his benchmark low for an “extended period.”

The challenge has been that markets aren’t fully buying those messages as the world economy improves and the Fed signals it may begin tapering its asset purchases as soon as next month. Bernanke has had to stress a slowing of stimulus doesn’t mean imminent rate increases, while investors have pushed up market borrowing costs in the euro area as it appears set to leave recession.

The next test for the BOE’s strategy is the Aug. 14 release of minutes for the meeting last week at which policy makers agreed to the new framework. Officials including Spencer Dale and Paul Fisher were among those to question the use of guidance prior to Carney’s arrival.

“It will now be vital for the markets to see if these decisions were unanimous,” said Nick Beecroft, chairman of Saxo Capital Markets U.K. Ltd. “Absence of unanimity will undermine the whole message and probably increase fears of earlier tightening.”

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