A bit of guidance from the Bank

Mark Carney All eyes will be on how Mark Carney voted at his first MPC meeting

If this is what happens when Mark Carney doesn't do anything to UK monetary policy, we can only wonder at the impact he might have in the future.

Though the Monetary Policy Committee (MPC) decided to keep policy unchanged today, it also decided to tell the financial markets that they were wrong about the likely timing of any future rate rise. Like magic, the pound has fallen sharply on the news. Long-term interest rates - the yields on UK government debt - are also edging down, though perhaps not as much as some on the MPC might have hoped.

"No change" in policy usually means no statement either - or not much of one. But you could say the content of today's statement marked a change of policy on its own.

Recent economic news, that statement said, was consistent with the Bank's forecasts for inflation. Those forecasts, incidentally, see inflation falling back to the 2% target within two years, on an assumption that bank rate does not go up until 2016. But, "the significant upward movement in market interest rates would… weigh on that outlook; in the Committee's view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy".

In case anyone failed to get the hint, the next paragraph reminds us that the chancellor has asked the MPC to explore the possibility for just such forward guidance in time for their August meeting.

Is this a game-changer? It depends on your definition. The published minutes of the June meeting had already noted that the turbulence in the bond markets had led the financial markets to expect a rate rise "around nine months earlier" than in the Bank's May Inflation Report. (Intriguingly, the minutes also said these market events "had demonstrated the sensitivity of financial markets to changes in policy expectations", and said that "some", who had voted no to more quantitative easing in June thought that "those events illustrated the likely effectiveness of asset purchases should they be needed in the future".)

You might say it's a small step from there to saying that those higher market expectations are wrong. But today's statement suggests that the MPC thinks the recent jump in long-term interest rates has left room for forward guidance to change financial market expectations, and, by extension, the future path of the real economy (see my Monday post for more on this)

Arguably, the MPC has gone one step further than that in its statement; not only has it identified room for forward guidance to change things, but it's chosen to explore some of that room right now in suggesting that forward rates are out of whack.

How will Governor Carney build on this outbreak of transparency next month? We will wait to see, though the FT's economics editor, Chris Giles, provides a useful guide to some of the options in today's FT.

In the meantime, Howard Archer at IHS Global Insight tells us that "all eyes will now be on the minutes of the July MPC meeting, with the million dollar question being how did Mark Carney vote on Quantitative Easing?" That is indeed the question of the day. Though looking at Mr Carney's pay package you'd have to conclude his vote is worth somewhat more than that - even after the tumble in the pound.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 86.

    85con. One therefore may ask why 43 complains about an ABSENCE of blogs which permits Comments about Egypt. That should be Mason's job but he is off-watch & Nick is not allowing Comments on his coverage.That too is worrying. For Nick is ex-Chair of an Oxbridge Tory Party. Bias is even worse than a mindless absence of moral perspective. But that is what Steph & Nick offer. As 43, relevantly, says.

  • rate this

    Comment number 85.

    My 43 has been referred & now is in limbo.
    Presumably the objection is that I was trying to subvert the purpose of this blog.
    But my point about coverage like this by Steph is that it is not deep enough. It fails to transcend analyses of market mechanisms. It fails to ask moral questions when economics is clearly one of the moral sciences.
    To hide behind descriptions is to fail as a commentator.

  • rate this

    Comment number 84.

    @83 I wouldn't comment on an individual's speculative activities, but if bond yields rise you should not be surprised to see prices of precious metals falling. And as bond yields have already risen, you should not be surprised at the apparently suppressed price of precious metals today.

  • rate this

    Comment number 83.

    You described me perfectly in the 2nd 1/2 of your comment. I am in precious metals now, believing their prices are being suppressed on purpose - despite physical demand being at record levels.

  • rate this

    Comment number 82.

    @81 If yields go up, it's no longer a bond yielding 4%. No one wants to buy it except at a lower price (and the fall in price is what pushed the yield up). Anyone thinking yields should move much higher than currently shouldn't be holding the bonds now (except to hedge their bet), since in their view they're currently trading at a premium (which disappears if the market begins to agree with them).

  • rate this

    Comment number 81.

    I agree, rates won't go up soon. But they will eventually, and relatively soon. When they do, many predict they'll suprass what Thatcher had when she came in.

    I hear you. But, who would want to hold onto a bond yielding 4%, when as you say, yields go up? If your an investment bank, why would you want to hold a lower yielding bond than your competitor?

  • rate this

    Comment number 80.

    @78 It doesn't matter what I think. The market's expectations today are priced into today's gilt prices. As these expectations continually vary, prices and yields adjust through activity in the market. How much does the view of the UK in 10, 20, 30 years or more from now actually change, day by day? Very little. Interest rates will go up, not by much, not soon; same thought tomorrow as yesterday.

  • rate this

    Comment number 79.

    @77 "low rate bonds" already have lower prices to compensate for the lower interest; this is what keeps their yields up. When the interest rate changes, there is no direct effect on yields, so no change in price. If future expectations change, this changes the price of all affected bonds, irrespective of their coupon. "Dumping" drives up yields by reducing prices, reducing the incentive to sell.

  • rate this

    Comment number 78.

    "Policy rates have no direct impact on yields;"
    Don't you think rates will go up as increased taxes, protectionist regulations, and huge government borrowing destroy what little productivity remains in the UK?

  • rate this

    Comment number 77.

    When rates go up, anyone holding low rate bonds will be missing out on higher paying ones. In search for better yield, they will dump £Billions of low paying gilts onto the market while chasing better paying ones as rates go up, as the UK is increasingly seen as riskier to lend to. Eventually, no one will lend to the UK, as we'll be too risky: A self-feeding storm to bankruptcy.

  • rate this

    Comment number 76.

    @75 The marginal utility of one person changing their mind is low. Countering flawed reasoning and correcting misapprehensions and factual inaccuracies is an act of charity pro bono publico.

  • rate this

    Comment number 75.

    #74---agreed but ure wasting ure time if u think #72 will understand any of it :)
    You must know from other Blogs that the poster in question is somewhat limited by hate and bitterness about everything...........product of a sad life.
    There is a poster , something like "No Extreme Posters" who's trying to help her with anger-management-----but is wasting his/her time. Hopeless !!!!

  • rate this

    Comment number 74.

    @72 Government debts are fixed interest, so a change in the yield on new gilts has no impact on existing interest payments. Yields on longer term bonds are already around 4%; that's priced in to gilts currently being issued. Policy rates have no direct impact on yields; increasing policy rates might actually reduce inflation expectation (and hence yields, reducing borrowing costs).

  • rate this

    Comment number 73.

    Re 52----a good posting : says it all really. We've got to pull together and make the long hard slog-remembering that we've escaped lightly copared to some poor devils who have suffered far more due to American disaster caused by their total lack of regulation. It's high time USA learned a bit more about Euro-style capitalism and the role a Govt HAS to play in day-to-day affairs.Glad about Carney.

  • rate this

    Comment number 72.

    With high suicide & unemployment levels, shrinking manufacturing but, magically, stocks, bonds & property are all up: We're doing great! All it took is £Billions in QE & Artificially low rates to effectively 0%.

    What happens when rates go up to merely 2%? The government hasn't a prayer in repaying it's colossal debt. We're worse than broke, we're deficit spending for this "success"

  • rate this

    Comment number 71.

    Carney a really good appointment and much work for him to do. A good start today with the retention of low int rate---as was to be expected from the man.
    Let America do as it wants with its rates and all else---they got us in this mess , now let's follow a BoE Gov who will not slavishly follow USA, as BoE traditionally has. Good news and great expectations.Let's hope Osborne can do HIS job better

  • rate this

    Comment number 70.

    56." The whole of Europe including the UK is going down the pan. We've had it. Welcome to the third world UK."
    A little aside for you - go and look at some actual socio-economic stats and list of world beating companies; and compare the UK to the rest of the world. ........Done that? Right now read your statement again. Sounds really stupid now doesn't it.

  • rate this

    Comment number 69.

    Yes! Carney is trouble. He's here to print and keep rates low, that's it.
    What's wrong with a strong pound? Germany did fine, until profligate EU countries required them German bailouts, why can't we survive with a strong £?

    Are you saying we should debase our currency, destroying savers and capital, to export more? Why didn't that work for Chile, Argentina or Zimbabwe?

  • rate this

    Comment number 68.

    I see the piggy bank economists are grumbling again..Yeah lets slash the deficit, up the interest rates. The pound soars, our factories are too expensive to export, householders are evicted, repossessed properties drag down the banks balance sheets. The list just goes on.
    How about we give Carney a chance, he's only just in the door guys, stop trying to hand him back his coat?

  • rate this

    Comment number 67.

    Man in new jo, not rocking the boat in first week, absolute shocker. His only role is to hold Gideons hand and guide him through the next 22 months.

    By the way Gideon, when will you actually admit to the country that borrowing is UP, the actual National debt is UP and that your time is... go on, take an educated guess !


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