LONDON: Robust jobs data and unexpected dissent from a Bank of England (BoE) policymaker created fresh doubts yesterday about how long the central bank will keep its vow to hold rates at their current record low.
New BoE Governor Mark Carney pledged last week to keep rates low until unemployment hits 7 percent — something he forecast would take three years - in a new approach for the central bank that is strongly backed by finance minister George Osborne.
But minutes of the BoE’s August policy meeting revealed one official thought the new guidance’s safeguards against excess inflation were too weak. Official data, meanwhile, showed a big fall in people claiming jobless benefits.
Ten-year gilt yields surged 5 basis points to hit a near two-year high and sterling rallied against the dollar as markets brought forward their expectations for a rise in BoE interest rates from their record-low 0.5 percent.
“Central bank jawboning works only if investors believe the central bank means what it says, and today’s minutes will not increase confidence in Carney’s words from last week,” said Rob Wood, a former BoE economist who now works at Berenberg Bank.
Martin Weale’s decision to vote against Carney’s flagship policy was not the only sign of disagreement on the nine-member Monetary Policy Committee (MPC).
Some members said a recent rise in bond yields - which Carney’s “forward guidance” pledge is partly designed to counter - may be justified by economic fundamentals. Others said there was likely to be a case for more asset purchases in future. “The minutes of the August MPC meeting show that the splits across the MPC that had been apparent earlier in the year are intact, despite the adoption of forward guidance,” said Barclays economist Simon Hayes.
The guidance, however, does appear to be having an impact on at least part of its intended audience, the British public. The proportion of people expecting a rate rise in the next two years has fallen to 40 percent from 53 percent in July, according to a Markit/Ipsos MORI poll of 1,500 households.
Britain’s economy is gathering strength and looks set to build on its 0.6 percent growth recorded in the second quarter of 2013. Employers have said they are hiring at the fastest pace since 2007, and yesterday’s labour market data confirmed this. Reuters
