Difference of Opinion
BOE policy makers say productivity will pick up as the economy recovers, meaning companies will get more output from their existing workers, which will limit the pace of hiring. Carney said yesterday that a difference of opinion between the central bank and other forecasters is “natural.”
“The market had a more positive view of the rate at which unemployment will come down and a more pessimistic view of productivity,” he said at a hearing of the Treasury Committee, a panel of lawmakers that scrutinizes the BOE.
Economists’ more positive outlook for the U.K. follows economic growth of 0.7% in the three months through June as well as a continued strengthening of services and manufacturing this quarter.
Recent signs of recovery have also boosted confidence in the housing market. A report by Acadametrics Ltd. today showed house prices rose to a record last month as government measures boosted demand and London’s property market continued to surge.
The Royal Institution of Chartered Surveyors today called for the central bank’s Financial Policy Committee to limit annual property price increases to 5% to prevent another bubble.
Even after recent improvements in the economy, two thirds of economists in the Bloomberg survey said the economy is still not at what Carney has termed “escape velocity.” The survey was conducted from Sept. 6 to Sept. 11.
In tandem with the pickup, gilt yields have risen and investors have increased bets on an interest-rate increase before 2016. Twenty-three of 33 economists surveyed by Bloomberg said guidance hasn’t yet been effective.
“There is a risk that households, businesses and financial market participants overreact to signs of a recovery,” BOE Chief Economist Spencer Dale wrote in a co-authored article with the central bank’s James Talbot published on the VoxEU.org website today. “Forward guidance provides a robust framework within which the MPC can explore the scope for economic expansion without putting either price stability or financial stability at risk.”
For Ross Walker, an economist at Royal Bank of Scotland Group Plc, Carney’s testimony to lawmakers yesterday failed to provide the clarity required.
“For a policy framework designed to bring greater transparency and enhance understanding of the MPC’s reaction function, a distinct sense of haziness pervaded the hearing,” he said. “The BOE’s core problem remains that it is difficult to provide greater transparency via forward guidance when there is a divided -- seemingly increasingly divided -- MPC.”
Philip Rush, an economist at Nomura International Plc, said policy makers testifying along with Carney showed little “pushback” against market predictions of an earlier rate increase. “Some comments suggested that the extent of the market move might be overdone, but intent to change those expectations appeared absent,” he said.
Carney has said his message is aimed at consumers and executives as much as investors, as they are the ones who will ultimately drive the economy.
“It needs to be supplemented by the common understanding of policy, not just in financial markets, but by businesses and households,” he said yesterday. “A given stance of policy that is better understood by people who make spending and investment decisions in the economy is more effective.”