As this BBC article suggests, Mark Carney has had a good first week in his new job at the Bank of England. Having impressed the media by turning up for work by 7 am on Monday (normal starting time in the City of London, by-the-bye) and travelling by Tube rather than limousine, Carney has wasted no time in setting a new tone for the Bank's relationship with the markets. Whether substantive policy changes will follow remains to be seen*.
Carney has begun to introduce to the UK a practice well known to followers of Canadian monetary policy: "forward guidance" of fixed income markets. In the past, the Bank of England normally made statements on the days of its monetary policy committee (MPC) meetings only if it had changed interest rates. Otherwise markets had to wait for release of the minutes of the MPC, several weeks after the event. And since rates were usually adjusted only in those months when the Bank had a new Quarterly Inflation Report to inform its decision making, this meant that markets had a long wait between meaningful policy pronouncements by the Bank.
The Bank of Canada, by contrast, has always issued a statement immediately following the end of its policy meetings. A few years ago these were often pretty perfunctory things, but under Carney they became increasingly substantial, and provided markets with real insight into the Bank's thinking as it evolved. This is what Carney will now try to do at the BoE.
As for the actual guidance provided to the markets, here is the key paragraph from the press release:
At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, 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.
What the Bank is saying is that the forward path of official interest rates implied by the Gilt yield curve is higher than the path that the Bank sees as probable. Gilt markets, in common with bond markets in other countries, have sold off in response to central bankers' hints that ultra-low rates and quantitative easing will soon be reined in. That rise in market interest rates is itself serving to curb the growth outlook, making higher official rates less necessary. This sort of feedback effect will always complicate efforts to provide guidance to markets, given the hair-trigger reactions of fixed income traders.
The Bank's press statement gave a boost to UK equities (and further weakened Sterling) as investors pushed back the expected date for an end to monetary policy accommodation. This was undoubtedly the Bank's intention, but it remains to be seen how long the present level of stimulus can safely be kept in place. The recent data flow in the UK has generally been positive, and growth data for Q2 are expected to show that the economy expanded by around 0.5% from the preceding trimester. Carney is going to face some tough decisions as the months go by, but it looks as though he is going to do his best to avoid blindsiding the markets when he makes them. That's good.
* Or insubstantial ones. One development in his first week that might have made Carney pine for Ottawa was a spat over the design of the next series of UK bank notes, which habitually feature portraits of important Britons. A group of feminists is angry that there will be no portraits of women on the new notes. Apparently HM the Queen, whose picture has been on every note and coin minted in the UK for the past six decades, doesn't count.
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