Bank of England rewrites forward guidance, signalling no rate rise until 2015

Bank of England governor says recovery is gathering pace, but output gap means it’s too early to raise borrowing costs. New forward guidance based on spare capacity. Here are the details of the new plan and the market’s reaction to it…


Powered by article titled “Bank of England rewrites forward guidance, signalling no rate rise until 2015 — inflation report live” was written by Graeme Wearden, for on Wednesday 12th February 2014 15.07 UTC

The latest news story

Our full, updated, news story on forward guidance is online here:

Bank of England to keep rates at 0.5% for at least another year

So we’ll take a break here in the blog, but will be back with any major developments….

Forward Guidance 2: What the readers say

Thanks, as ever, for the ace comments below the line – here’s a selection:

So, only 1-1.5% spare capacity.

But growth of 3.4%, 2.7% and 2.8% over three years.

With rates only going up slightly in, say, 18 months.

That makes no coherent sense, surely?

‘But the number of part-time workers looking for full time work is near a record high. And he cautions that “the recovery as yet is neither balanced nor sustainable.”’

It astonishes me that, apparently, part-time working has never been regarded with the significance it should: this, and the fact that “hours worked” is also to be given more consideration in the Bank’s assessment of economic progress, underlines his caution that “as yet the recovery is neither balanced nor sustainable.”

House of cards?

It is almost as if the Bank of England is trapped. Right now it should raise rates, but maybe it knows why the system cant take it if it does.

smoke and mirrors – we cant put up rates unless Europe and US also put up rates, its a macro economic war,

Italian PM to announce new plan tonight

Important developments in Italy, as coalition prime minister Enrico Letta tries to maintain his position as government leader in the face of a possible challenge from centre-left reformer Matteo Renzi (see 8.49am for details).

After holding talks with Renzi today, Letta has decided to announce his new plan for the coalition at 6pm local time, or 5pm GMT.

Here’s the statement:

“Enrico Letta will present “Commitment Italy”, a proposal for a coalition pact between the parties that support the government.”

Democratic Party (PD), the coalition partner (and Letta’s own party) will then decide on Thursday whether to support the current PM. If not, then PD leader Renzi could take over.

Renzi himself has tweeted that he will make his own position clear tomorrow “in the open” at the PD meeting:

A calm start to trading in New York. Here’s the opening prices:

  • S&P 500 UP 1.06 POINTS, OR 0.06 PERCENT, AT 1,820.81 AFTER MARKET OPEN


This may be a little awkward for the Bank — today’s quarterly inflation report (page 12) shows that forward guidance made households slightly less confident about future economic prospects.

Just 1% said they felt much more confident, while 14% were slightly more confidence. But 12% were slightly less confident, and 4% much less confident.

Here’s the chart (which also shows that, as Carney said earlier, the pledge did make firms more upbeat about their future prospects)


Economist Shaun Richards is unimpressed by Mark Carney’s defence of forward guidance:

Apparently the first version has been so successful it is to be immediately abandoned! It is being replaced by something so vacuous that it cannot go wrong. If you add eighteen new metrics to a system there is bound to be something you can hang your hat on.

Rather ironically this seems to involve the original inflation target as Mark Carney does what Elvis Presley described as this.

“Bright in early next morning /

it came right back to me.”

Here’s his analysis: Mark Carney’s honeymoon period is over as Forward Guidance is rebooted – let’s hope his luck isn’t

Two arrests in Rolls-Royce inquiry

In other news, two men were arrested in London this morning as part of the Serious Fraud Office’s investigation into British aerospace and defence group Rolls Royce, and its activities in Asia.

The SFO told Reuters that:

”In connection with a Serious Fraud Office investigation, we can confirm a number of search warrants have been executed at various properties in London today. Two men were also arrested.”

The SFO opened its criminal inquiry into Rolls-Royce just before Christmas, around a year after allegations of allegations of malpractice involving the aeroplane engine maker in Indonesia and China came to light.


Larry Elliott, our economics editor, has returned from the Bank of England to put his finger firmly on the problem with the rejigged forward guidance on monetary policy — can the Bank really judge the output gap correctly?

Here’s a flavour:

Put simply, the output gap is the difference between the actual level of activity in the economy and its potential level. Policy makers assume that the economy has a long-term trend rate of growth, which in the UK’s case is between 2-2.5%. In recessions, activity falls below this level and so there is scope for the economy to grow faster than trend during recovery periods without inflation picking up. But it is also assumed that some of the damage caused by recessions is permanent, because investment is scrapped and unemployed workers lose their skills.

As a result calculation of the output gap is highly subjective. The Treasury publishes a range of estimates from forecasters and these vary from 0.8% to 6%. The Bank’s estimate is 1-1.5%, but that figure depends on a) the economy’s trend rate of growth; b) the permanent damage caused by the recession and c) likely productivity growth in the future.

All of which means forward guidance is now extremely fuzzy….

More here: Forward guidance version 2: will the public believe it?

Forward Guidance 2 could threaten financial stability

Here’s the case against Forward Guidance 2, from Eimear Daly, head of market analysis at Monex Europe.

She warns that the Bank could easily threaten financial stability if it doesn’t end its exceptionally stimulative monetary policy in time.

Mark Carney has evolved forward guidance to its next phase. This is a nice euphemism for saying outright that forward guidance has been abandoned.

The Bank of England admitted that unemployment will reach the all-important 7% threshold in January, but the economy is by no means ready to stomach higher interest rates.

The next economic indicator that future rate rises will be linked to is labour market spare capacity – an economic idea so vague and hard to track that it provides the scope to keep policy ultra easy, despite a gathering recovery.

About that u-turn…..

The Independent’s economics editor, Ben Chu, has been rifling through the August 2013 quarterly inflation report, and reminds us that the Bank was more sceptical about using the output gap as a target six months ago:

While the FT’s Chris Giles flags up that the Bank argued against ‘fuzzy guidance’ initially:

The new forward guidance may sound like “we won’t raise rates until we decide it’s the right time to raise rates”.

It’s rather more complicated than that, of course (don’t forget those 18 different economic indicators that the bank will be tracking!). Ian Stewart, chief economist at Deloitte, sums it up thus:

Forward guidance has morphed into something fuzzier, but what is clear is that the Bank is in no hurry to raise rates and, when it does, it intends to go slowly. Mr Carney believes that the recovery is gaining momentum. The last thing he wants to do is to snuff it out with aggressive interest rate hikes.

CBI likes the look of Forward Guidance 2

Over to the CBI for the business reaction — its chief policy director, Katja Hall, agrees that there’s still a significant output gap in the UK economy:

“Forward guidance has clearly been effective in influencing companies’ expectations of when interest rates will rise and in cementing their confidence in the recovery.

“The Bank’s new guidance will give businesses further peace of mind that interest rates will stay low for some time, until investment and incomes are growing at sustainable rates. And the Bank has made clear that even when the economy is operating at more normal levels, rates will only increase gradually.”

People may be less willing to invest or spend on the high street because the new forward guidance provides more uncertainty, suggests Howard Archer of IHS Global Insight:

Son of Forward Guidance – necessitated by unemployment falling much faster than the Bank of England had forecast when it set up the policy last August – may well prove to be a more difficult entity for businesses and consumers to understand given that it is based on the overall state of the economy and is not linked to one variable….

Consequently, consumers and businesses may well find it more difficult to confidently gauge what is likely to happen with interest rates going forward, which could lead to greater caution in their spending decisions. While some degree of greater consumer caution may be no bad thing given concern over debt levels, the Bank of England does want to see businesses invest.

Dr Gerard Lyons, economics advisor to Boris Johnson, also reckons the Bank has done the right thing:

Rob Wood of Berenberg Bank has applauded Mark Carney’s willingness to tear up his first attempt at forward guidance, in the face of an improving economy.

Showing no problems at all with an abrupt U-turn, Mark Carney and the Bank of England binned their threshold based forward guidance and returned to inflation targeting, with a few bells and whistles attached. Rather than expecting the first rate hike in late 2016, as they did back in August, their forecasts are now consistent with a hike in Q2 2015. Given that past BoE forecasts have been so spectacularly wrong, we remain comfortable forecasting the first hike for Q1 2015.

Wood also argues that the new forward guidance is effectively a return to the old days of targeting inflation:

Guidance 2.0 is returning to inflation targeting with some added bells and whistles. Getting down to brass tacks, the BoE said clearly that it is planning to adjust interest rates as slack in the economy is eroded in order to deliver inflation around the target. That is inflation targeting. The inflation forecasts give now, as they always have, a steer on what the BoE think about interest rates.

The added bells and whistles are a continued break with the Mervyn King era; additional talk about where the BoE thinks interest rates are heading and a list of indicators that it will use to judge whether the economy is evolving as expected.

That was a missed opportunity to quiz Mark Carney on important issues, agues Simon Nixon of the Wall Street Journal:

Manos Schizas, Senior Economic Analyst at Association of Chartered Certified Accountants, says Carney is right to warn that the UK recovery is still fragile.

Schizas adds, though, that the new forward guidance (based on unemployment, involuntary part-time work, hours worked, participation, labour productivity, wages, and a range of other indicators) is hardly straightforward:

On the one hand, this will reassure those who say the recovery is not yet robust enough for the Bank to ease up on its stimulus – and this is the Governor’s view as well. On the other hand, making a call against all of these multiple variables is more art than science, which will create more uncertainty.

Stewart Cowley, portfolio manager at Old Mutual Strategic Bond Fund, puts his finger on the problem with the original forward guidance – the unemployment rate isn’t easy to predict:

“Setting strict economic targets for interest policy is like playing soccer with a rugby ball – it’s too imprecise and no matter your intentions it will bounce off course.

Unemployment numbers don’t take into account the breadth of human experience and is too coarse a measure to be useful for policy setting. In that case it isn’t surprising that the BOE abandons strict numerical targeting. What a capitalist economy like we have in the UK needs is a new and vigorous credit cycle built on a stable banking system and a working population that has the confidence and self-assurance to borrow. The BOE would do well to concentrate on that.”

Forward Guidance – all the best reaction

There’s masses of reaction to the quarterly inflation report – I’ll round up the best.

Jeremy Cook, chief economist at the foreign exchange company World First, dubbed the new policy “forward suggestion”, with an American flavour.

“With the Bank of England unable to meaningfully target unemployment for interest rate increases, it seems that Carney’s ‘forward guidance’ strategy is now better described as a plan for ‘forward suggestion’.

“The plan is to keep rates low after the threshold has been hit, much like the Federal Reserve’s forward guidance has changed in the past few months as it has become clear that job increases have come on quicker than had been expected.


A reminder from the Bank of England about how it handles the levers of monetary policy:

Inflation Report – the key charts

Here are the key fan charts from the Quarterly inflation report — the darker coloured areas show where the Bank reckons inflation and growth are most likely to proceed:

A quick summary

To recap — the Bank of England has revised its forward guidance on interest rates, pledging not to raise interest rates until the UK economy has mopped up most of the output lost in the financial crisis.

It is now suggesting that the first interest rate rise could come in just over a year’s time, in the second quarter of 2015.

The new policy was unveiled as the Bank conceded that its original guidance, released just six months ago, needed to ‘evolve’ as the UK unemployment rate has fallen more sharply than expected.

The new forward guidance is based on the remaining slack in the UK economy – measured by a range of indicatorsin an attempt to measure productivity as well as joblessness. There’s no single trigger for a rate rise — putting the BoE closer to other central banks.

In sometimes sharp exchanges with journalists in London, governor Mark Carney denied that forward guidance was a flop, saying that the policy had given businesses the confidence to invest.

He also insisted that future rate rises would be gradual, and did not see a return to historic averages (say 5%) for some time.

The Bank also hiked its growth forecasts, seeing GDP rising by 3.4% this year. And its chief economist, Spencer Dale, predicted that wages will probably finally rise faster than inflation by the end of this year.

The pound jumped on the news, up almost a cent at $1.6535.


Carney: We don’t want to have forward guidance forever

Final question — is this the governor’s final word on interest rate policy, or should we expect Forward Guidance 3?

After a pause, Carney insists that the Bank does not want to keep forward guidance forever. And turning to his colleagues alongside him, he asks whether they’ve enjoyed the last five years.

Not particularly, they grunt back.

Our aim, Carney reiterates, is to move from the recovery phase to the expansion phase — and to make sure that this expansion phase is durable.

That’s the end of the press conference. Details and reaction to follow!

A question about the eurozone.

Is the Bank of England worried that the German constitutional court has just asked the European Court of Justice to examine the European Central Bank’s OMT programme (a pledge to do ‘whatever it takes’ to protect the single currency by buying government bonds)?

Carney says that the Bank isn’t an expert on legal issues (especially German law) — and bats the question over to Paul Fisher, Executive Director of the Bank of England’s Markets division.

Fisher says there is now market confidence in the future of the euro – pointing to charts in today’s report showing how the borrowing costs of peripheral countries fell closer to Germany’s once Mario Draghi announced the OMT programme.

Are we getting carried away with talk of a UK recovery, with growth in 2014 now seen at 3.4% (now 2.8%)?

Carney says that the Bank is “not complacent at all” about the recovery.

Carney also sways away from a question on potential risks to the UK economy if an independent Scotland were to keep the pound (a hot topic today)

He says that the Bank’s job under all circumstances is to implement the mandate set by the democratic elected athorities.

We will execute whatever we’re given.

Carney points out that consumers have been proving much of the stimulus of the recovery — it’s “very important” that there is a transition to business investment to drive growth.

Why didn’t the Bank copy the Federal Reserve and publish a chart showing its predictions for future interest rate rises, asks Szu Ping Chan of the Telegraph.

Carney explains he’s not a fan of these charts, as they are inevitably based on the accuracy, or otherwise, of the Central Bank’s own forecasts. So they’re not a pure reaction function — they show “the path of rates if your forecasts turn out to be true”

Governor, you don’t want to provide time-contingent forward guidance, but can you rule out a rate rise in 2014?

No, that would be time-contingent forward guidance, responds Carney, driving the question to the boundary.

Bank sees real wages rising later this year

When might real wages finally turn positive (ie, grow faster than inflation)?

Chief economist Spencer Dale says the Bank hopes it could finally happen in the second half of this year – but only if productivity recovers.


Key event

City AM asks whether the Bank can see interest rates returning to historically normal levels.

Carney says he’s not a pessimist on the ability of the economy to return to interest rates which were once consistent with stable inflation and growth.

But, that is well beyond the Bank’s forecast horizon.

The financial markets are pricing in the first rate rise in spring 2015, and returning gradually to 2% from there – are they right, asks Hugo Duncan of the Daily Mail.

Carney doesn’t endorse, or otherwise — he says the Bank isn’t publishing its own forecast path for rates.

What’s your message to business today?

The message is that we will set an appropriate path of monetary policy so that jobs and businesses grow, says Carney.

Businesses are good listeners and seem to understand messages pretty well, he adds, pointedly.

Unlike pesky journalists?

Carney again denies that he blundered by picking the unemployment rate to underpin forward guidance.

It’s a good measure, he insists – it doesn’t get revised (unlike, say, GDP) and it shows slack in the economy being used up. It was the right metric, not the wrong one.

Carney reiterates that the Bank wants to eliminate spare capacity in the economy over the forecast horizon.

Deputy governor Charlie Bean also weighed in on this point, suggesting that the MPC would probably want to start tightening policy before all the space capacity is absorbed/closed.

Update: These reuters snaps explain Bean’s point:





Chris Giles of the FT puts an elegant boot in — the governor’s first stab at forward guidance was billed as for the medium term and lasted six months, so how long until this effort needs to evolve?

Carney doesn’t offer a hostage to fortune, but concludes that forward guidance will be with us for a while.

Pound rises

The pound has jumped by almost a cent since the inflation report hit the wires — up to $1.654 against the US dollar.

Asked about this by Emma Charlton of Bloomberg, Carney points to the Bank’s new, raised, growth forecasts — saying that it is more optimistic about the eurozone for the first time in a while.


Our own Larry Elliott reminds Mark Carney that the Bank failed to spot the financial crisis, misread the recession, often misreads inflation, so how can the public believe a word it says?

Carney defends the Bank’s record – claiming it got the big decisions right (when to cut rate, when to see through short-term inflationary pressures, when to buy government gilts).


Ed Conway asks Mark Carney whether, with hindsight, he would have done things differently back in August if he’d known how poor the Bank’s forecasts would prove to be.

Carney indicates that he might perhaps have set the threshold differently if he’d known then what he knows now — before (as Conway slips a second question in) staunchly defending his flagship policy:

If I’d known then when I know now, than absolutely I’d have given a clean message to businesses – a message they understood, which many have responded to, says Carney.

That message has “absolutely” helped the recovery, he concludes.

So no admission that forward guidance was a mistake.


What is the public meant to make of forward guidance based on the output gap, asks Phil Aldrick of The Times.

Carney says that the recovery since August has been stronger than expected – that’s a goood thing

We’ll update our definitions of the state of the economy regularly, to give a medium-term perspective to households and business on where rates are likely to go.

And the key point is that productivity has not recovered — the Bank doesn’t see it hitting pre-crisis level for a while.


Onto questions — Hugh Pym of the BBC says the Bank has torn up the guidance it announced six months ago, what are borrowers to make of it?

Carney defends himself — saying the August policy worked. We’re in a different place now, we’ve taken stock, and revised the new guidance.

This is the take-away quote from Carney, explaining that as forward guidance evolves:

The MPC will not take risks with this recovery.

Here’s some other top lines:

“Forward guidance is working” – “uncertainty about interest rates has fallen” and “most importantly, businesses have understood the guidance” – with three quarters saying it has boosted their confidence according to a Bank survey.


The New Forward Guidance

Carney has now outlined his new forward guidance – and it’s a much more complex policy than before. Here’s the key points:

1) For the first time, the Bank will not raise rates until the spare capacity in the UK economy has been fully absorbed (which, as explained at 10.30am, won’t happen until 2015).

2) It will consider a broad range of indicators — including the unemployment rate, business surveys, the number of hours worked

3) When rates rise, they will do so gradually. Exceptional stimulus will remain appropriate for some time

4) The Bank is publishing a clutch of new forecasts (I think he said 18) – they won’t all be right, Carney said, but they’ll show the Bank’s view.

5) The Bank will hold its stock of £375bn bonds bought under quantitative easing at least until the first rate rise.

Carney: The recovery is neither balanced not sustainable, yet

Carney then concedes that the unemployment rate has fallen much faster than we expected, and will hit the initial 7% threshold “in the spring”.

He argues that some of the sharp fall is because the long-term unemployed total has fallen — that means that a lower rate of unemployment is consistent with stable inflation.

But the number of part-time workers looking for full time work is near a record high.

And he cautions that “the recovery as yet is neither balanced nor sustainable.”

Productivity is still below its pre-crisis level, wage growth is weak, and the household savings rate will probably fall further, he points out.


The inflation outlook has been “more benign” than the Bank expected, Carney says – (ie, there’s not much pressure to raise rates to control the cost of living).

Mark Carney begins by pointing to the encouraging signs in the UK economy — saying the recovery has gained momentum recently. Jobs are being created at a record pace.

And he defends his forward guidance – saying that it helped calm concerns that rates would rise too soon. Businesses got the message, he says – it encouraged them to invest and hire.

Inflation Report released

BREAKING: the Bank of England has signalled it will keep interest rates on hold at the historic low of 0.5% for at least another year, despite forecasting strong growth of 3.4% in 2014.

It had concluded that there is still too much spare capacity in the UK economy to stomach a rate rise yet, despite unemployment likely to fall to 7% in January.

From the Bank, Larry Elliott and Angela Monaghan report.

Threadneedle Street said in its February Inflation Report that a lack of inflationary pressure, spare capacity, and “headwinds” at home and abroad, meant that“bank rate may need to remain at low levels for some time to come”.

Seeking to reassure businesses and households, the Bank’s Monetary Policy Committee said that when rates did eventually go up, they would do so only gradually, settling around 2-3% – below the pre-crisis norm of around 5%.

“Raising bank rate gradually would guard against the risk that, after a prolonged period of exceptionally low interest rates, increases in Bank rate have a bigger impact than expected on output and spending.”

Last summer the Bank’s governor Mark Carney announced a “forward guidance” strategy, under which the Bank would consider a rate rise only when the unemployment rate – then 7.8% – fell to 7%. At that time it was not expecting the jobless to fall to the threshold until early 2016.

The MPC now expects the next set of official figures to show that the jobless rate fell to 7% in January, forcing it to assess whether the time is right to raise rates for the first time in five years from the all-time low of 0.5%.

It concluded that there is still spare capacity amounting to between 1-1.5% of national output, that can be absorbed by a growing economy before rates need to rise.

The Bank sharply upgraded its growth forecasts for 2014 to 3.4% from its November forecast of 2.8% – much higher than other predictions from the Office for Budget Responsibility and the International Monetary Fund.

The Bank is pencilling in a big surge in both business and housing investment of 11.5% and 23% respectively this year. Consumers are expected to run down their savings to compensate for another year of weak earnings growth.

The Bank is expecting the economy to grow by 2.7% in 2015 and by 2.8% in 2016.


Ever wanted to put some questions to the head of a UK bank? Now’s your chance.

Ross McEwan, RBS chief executive, will be holding a Q&A session with Guardian readers this morning — with our City editor Jill Treanor.

It starts at 11am – but you can suggest your question from 10.30am:

Q&A: Ross McEwan, RBS chief executive, answers your questions

Quarterly inflation report – how it works

Economics reporters are corralled at the Bank of England now, looking at an embargoed copy of the new Quarterly Inflation Report. There will be a flurry of newswire flashes at 10.30am GMT exactly when the report is released.

Mark Carney and senior colleagues will then hold a press conference at the Bank — starting with a prepared statement. The press conference will be streamed live here, and should also be carried on the main news channels.

The Bank will probably tweet details itself (they’re terribly up to date at Threadneedle Street)

The City is fairly calm this morning. The pound is unchanged against the dollar at $1.645 as investors wait to hear from Mark Carney in just under 30 minutes time.

The FTSE 100 has risen 23 points to 6696, led by supermarket Wm Morrison (and those rumours of a possible buyout). Mining stocks are also up, after China reported a surprisingly strong rise in imports and exports in January. That’s bolstered optimism for the global economy.

Here’s Nick Fletcher’s opening market report: FTSE moves higher after Yellen speech and ahead of Carney update

Jane Foley of Dutch bank Rabobank points out that UK inflation has finally fallen back to 2% (the BoE’s target), taking pressure of the central bank to raise borrowing costs.

She reckons Carney would be unwise to cut the jobless target to 6.5% — that could damage its credibility.

Instead, the governor could copy the Federal Reserve and argue that the recovery in the labour market hasn’t reached the sustainable point where justify higher borrowing costs.

She told clients :

Fed chair Janet Yellen spent some time in her appearance in Congress yesterday talking about underemployment in the US economy.

Carney could follow a similar tack and in effect water down the significance of the unemployment rate as a measure of the broad health of the labour market.

These charts, from the ONS, show how the UK unemployment rate has tumbled from 7.8% to 7.1% in the six months since forward guidance was announced (depicted by that black splodge).

But on a historic base, the jobless rate is still high:

And by simply targeting the jobless rate (as a measure of spare capacity in the UK economy), the Bank isn’t considering other factors — such as the failure of wages to keep pace with inflation since the financial crisis began.


One of the founding members of the Bank of England’s Monetary Policy Committee, Dame DeAnne Julius, has predicted that forward guidance will be broadened today.

Speaking on the Today programme this morning, she said Mark Carney will adjust the plan to include wider analysis of the UK labour market.

She also offered Carney some support, saying forward guidance was the right idea at the time – but now needs a rethink.

New power struggle in Italy

Over in the eurozone there is fresh political upheaval in Italy — where the country’s prime minister, Enrico Letta, faces the threat of being ejected from office.

An internal row in Letta’s party, the Democratic Party, means he could be succeeded by Mattio Renzi — the charismatic leader of PD who is dubbed, by some, Italy’s Tony Blair or Gerhard Schröder.

Renzi, the logic goes, is the best man to drive through structural economic reforms in Italy and get its economy growing again.

PD will hold an internal meeting tomorrow night — where they could decide to no longer back Letta, a move that would push Renzi into power.

The FT has a good take on the situation:

Mr Letta, who came to office last April after elections a year ago resulted in a hung parliament, has dismissed reports that he intended to resign. On Tuesday he stated that he would soon announce a new pact with his existing centre-right coalition partners with an ambitious programme to lift Italy out of recession. This plan would also involve a cabinet reshuffle.

The Democratic party leadership is due to discuss Mr Letta’s proposals and the fate of the government on Thursday, but expectations were rising that Mr Letta would fail to win his party’s support and be forced to resign.

Should that happen, then Giorgio Napolitano, the 88-year-old head of state with constitutional powers to dissolve parliament and nominate a prime minister, could ask Mr Renzi to form a new government – possibly as early as this weekend – rather than call snap elections

The financial markets are taking the news calmly. Italy’s government debt is trading pretty flat this morning, as bond trader Gustavo Baratta reports from Milan.

Our economics editor, Larry Elliott, laid out the five options for Mark Carney over interest rate forward guidance in his column on Monday.

They boil down to:

  • cut the threshold where the Bank might start considering raising borrowing costs to a 6.5% jobless rate, rather than today’s 7%.
  • Broaden the target, to include measures such as average earnings growth or the increase in nominal GDP (growth unadjusted for inflation)
  • Promise that the Bank won’t raise rates for at least two years
  • Copy the US Federal Reserve and release a chart showing the Bank’s view of where borrowing costs are heading
  • Copy the European Central Bank and embrace unconditional forward guidance — saying that rates will stay at their record low levels for an “extended period”.

That last option is quite risks, given the Bank’s patchy forecasting record. As Larry puts it:

Carney would say that the MPC is looking at a whole bunch of indicators and will start to talk about tighter policy when they are flashing amber.

On past form they will be flashing amber for some time before the Bank notices – so that moment is some way off.

More here: Bank of England’s method of setting interest rates needs reviewing

Reckitt Benckiser cautious on emerging markets

Reckitt Benckiser, the consumer products giant, has joined the ranks of companies warning that emerging economies are a trickier place to do business.

The firm (maker of Cillit Bang, Air Wick and Strepsils) told shareholders:

Market conditions are more challenging now than at the beginning of last year, particularly in some emerging markets.

It reported a 6% drop in sales across Russia, the Middle East and Africa (or RUMEA in Reckitt speak), blaming “a further slowdown in Russia and continued socio-political challenges in certain markets impacted growth in the quarter”.

Wm Morrison ‘looking for a buyer’

A flurry of excitement in the City this morning — the family behind supermarket chain Wm Morrison is reportedly inquiring whether a private equity firm might care to take them over.

Shares in Morrisons jumped 5% at the start of trading — although it’s not clear that a bid is imminent.

As Bloomberg put it:

The founding family of U.K. grocer Wm Morrison Supermarkets Plc has contacted private-equity funds such as CVC Capital Partners Ltd. and Carlyle Group LP to weigh their interest in taking the retailer private, people with knowledge of the matter said.

The family has so far been unable to find a buyout partner due to concerns about Morrison’s slow sales growth and the size of the deal, said two of the people, who asked not to be named because the talks are private. The Morrisons hold about 9 percent to 10 percent of the grocery-market chain, two of the people said.

The family also has approached other private-equity funds including Apax Partners LLP, the people said. However, Apax has decided not to pursue a deal, one of the people said.

More here: Wm Morrison Founding Family Said to Gauge Buyout Firms’ Interest

Quarterly Inflation Report: What the economists predict

Capital Economics’s Jonathan Loynes says Mark Carney would be wise to widen the scope of interest rate forward guidance, when he presents the Bank’s quarterly inflation report today:

There have been several hints from Governor Mark Carney and his colleagues to suggest that today’s Inflation Report will see the MPC’s existing single variable, state-contingent forward guidance dropped in favour of a rather broader form of guidance. In place of the unemployment forecast chart, or at least alongside it with greater prominence, there seems likely to be a discussion, and perhaps charts, of a number of other measures of labour market slack.

The broad message will be that borrowing costs are staying at their record low for some time, Loynes added….

While this change would help to tackle the problems associated with making monetary policy excessively dependent on one single indicator, it might also make it harder to extract a clear and straightforward message from the Inflation Report. Perhaps, then, the best course of action will be to concentrate most closely on the one thing we know will be included in the Report, the MPC’s inflation forecast. With inflation itself having fallen more sharply than the Committee expected back in November, while Q4 GDP growth was weaker and the pound is stronger, the message from that at least should be relatively clear. Interest rates are going nowhere for some time yet.

Chris Weston of IG reckons the Bank could learn from the Federal Reserve:

A view I feel seems realistic would be to change guidance in-line with the Fed; whereby rates will stay low even if the unemployment rate drops through the threshold or rates are staying low for a long period.

Clearly there is still slack in the UK economy and similar to Japan, earnings are still far too low, relative to the level of inflation, and certainly too low to deal with a central bank hiking interest rates.

Mark Carney could even factor in the UK’s cost of living crisis by saying the Bank won’t hike rates until real wages are rising, suggests Michael Hewson of CMC Markets:

The key question today will be whether or not Mr Carney either quietly drops the unemployment threshold, revises it, or pushes the market in the direction of average wage growth relative to price inflation, or whether he toughs it out by insisting that the unemployment rate was one indicator, and only a threshold, along with the inflation rate, and that because both are falling the need for a rate hike remains some way away.

It seems highly unlikely that he would tweak the guidance lower to 6.5% because he would run the risk of the Bank losing credibility, at a time when its credibility is already stretched due to its inability to hit its inflation target over the last five years.

Bank of England’s quarterly inflation report released this morning

Good morning, and welcome to our rolling coverage of the latest events across the financial markets, the economy, the eurozone and business.

A week may be a long time in politics, but six months is all too short in the world of central banking. Especially when it comes to predicting when interest rates might rise from their current record low levels.

When Mark Carney presents the Bank of England’s new quarterly inflation report this morning, the governor will have to admit that the “forward guidance” unveiled so proudly six months ago needs serious remedial attention.

Having pledged in August not to consider raising borrowing costs until the UK unemployment rate has fallen to 7% (which the Bank envisioned sometime in 2016) Carney has watched the jobless rate slide more dramatically than a Sochi snowboarder, from 7.7% to just 7.1% at the last count.

Carney has stated many times recently that the UK economic recovery isn’t strong enough to support a tightening of monetary policy. So the governor will be under serious pressure to convince the judges in the City, and the media, that he’s still got a firm grip on monetary policy.

Economists predict that he’ll adjust forward guidance — adding a wider range of factors, rather than just the blunt 7% target that has put the Bank’s forecasting credibility on the skids. I’ll round up some predictions shortly.

Alongside the updated forward guidance, today’s Inflation Report will also contain the Bank’s new forecasts for UK inflation and growth. It’s released at 10.30am sharp, followed by a press conference with Fleet Street’s finest….

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