Initial analyst responses to Bank of England inflation report and Q&A

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Some reactions to the Bank of England's quarterly inflation report and governor Mark Carney's announcement of a forward guidance policy.

Joe Rundle, head of trading at ETX Capital:

Sensible Fed-style strategy adopted by dovish governor BOE Mark Carney, switching things up at the Bank of England since his occupancy started in July. At the press conference, Carney throws cold water on some of the recent optimism over the UK economy returning to boom any time soon by cautiously saying that risks remain on the downside….

On the topic of tightening policies, Carney says the BOE’s biggest concern is the risk of unwarranted tightening – this appears to be one of the reasons why forward guidance has been introduced. Carney wants to prevent any misinterpretation of monetary policy by the market in the years ahead but makes it clear that forward guidance is not some kind of promise on interest rate policy. Rather, the BOE’s forward guidance seems to be more of a method of communicating the Bank’s strategy to the market/public in order to ease conditions and uncertainties in financial markets, taming unnecessary bouts of volatility. This forward guidance approach is a clear change in communication from the Bank, providing greater transparency and clarity in an attempt to restore confidence and creditability to the Bank.

Jeremy Cook, chief economist at World First:

The targeting of 7% unemployment, all things being equal, suggests that interest rates will stay at the current level until Q3 of 2016. Although we doubt a rate cut from the Bank of England is forthcoming, they have kept the door open to further asset purchases given the emphasis that Carney has placed on the fact that market interest rates imply a faster withdrawal of stimulus than is likely.

Jens Larsen, chief European economist at RBC Capital Markets:

When is employment expected to hit 7%? On the Bank's forecast, unemployment is about as likely to be above as below the threshold at the end of the forecast horizon in Q3/2016.  But looking at their forecast, the unemployment rate is still above the threshold at that point. Clearly, this forecast is uncertain, and faster output growth and weaker productivity growth may well push that around. But on balance, we think that this forecast looks reasonable.

On the basis of this Report and our own assessment of the unemployment rate, we revisit our call for the first rate hike: we move that from Q3/15 to Q3/16.  The main risk that might bring about an earlier rate hike is that faster output growth is not accompanied by stronger productivity growth. On the other hand, unemployment may prove stickier than the MPC thinks; or inflation may fall faster.

Andy Scott, premier account manager at HiFX:

There were no major surprises in today’s report, they were fairly realistic about the recent pick up in growth which is encouraging but is merely a return to the historical average of what would be expected. We’re still a long way from the escape velocity that Mr Carney has spoken about and there remains a lot of spare capacity in the economy due to the lack of growth. 

Now that the market has had the forward guidance confirmed and no longer has to speculate, this could actually be very positive for the pound since the economy is now performing better. Investors don’t like uncertainty and that’s shown in the value of sterling since Mr Carney began his tenure at the start of July. Perhaps now its value will better reflect the relative outperformance of the economy, particularly against our main trading block the Eurozone.

Ian Kernohan, Economist at Royal London Asset Management:

The late 2016 guidance on stimulus withdrawal is more dovish than the market was expecting, although this is offset to some extent by the 7% unemployment rate threshold, which is quite high, and the “knockout” caveats on inflation and financial stability.  Expect greater focus on the monthly labour market report in general and the productivity puzzle in particular.  The acid test of this new policy development will be the stability of interest rate expectations in the face of shifting economic news.

Britmouse, economics blogger:

Very, very weak….

The MPC expects to fail.  As with the Fed, we could have unemployment at 8% for the next century and the MPC cannot be judged to have deviated from its guidance.

Markets dropped on this announcement, so this is an effective tightening of policy versus what was expected.  Osborne's gamble failed.

Howard Archer, chief UK and European economist at IHS Global Insight:

At a time when improving economic activity could lead to a marked increase in expectations of when the Bank of England could start to tighten monetary policy, forward guidance is most likely to be an effective tool….

While it is abundantly clear from the threshold set that the Bank of England is not going to raise interest rates for some considerable time to come, the Bank is not giving a guarantee now that they will not rise before mid-2016….

There is also the very real risk that inflation expectations could become significantly destabilized if the economy sees further marked improvement over the coming months, and consumers and the markets believe that the Bank of England will still keep interest rates down at 0.50% until mid-2016.

We actually believe that the unemployment rate could get down to 7.0% by late-2015, particularly given the surprising strength of the labour market in recent times. Much could depend on how many people return to the labour market as economic activity picks up. While this would not necessarily mean that the Bank of England would start raising interest rates in late-2015, it does highlight the fact that differing economic forecasts have different implications for when interest rates could start to rise.

John Longworth, director general of the British Chambers of Commerce:

We agree with the committee that a decline in the unemployment rate to seven percent is unlikely in the next few years, so it looks as though interest rates will remain low for quite some time. This will give businesses a much-needed confidence boost when looking to invest, as they know that any plans will not suddenly be derailed by a hike in interest rates….

While the governor made it clear that forward guidance is not a legal commitment and will ultimately depend on economic circumstances, it is still a positive development. However, we would like to have heard something more concrete about how the MPC plans to underpin the recovery. We would urge the Bank of England to use its balance sheet to further capitalise the British Business Bank or underwrite private investment in infrastructure projects, as this would help to secure the long-term economic future of the UK.

From Twitter:

World First, foreign exchange organisation:

Danny Blanchflower, economist and ex-MPC member:

Anatole Kaletsky, economist and journalist:

Ben Southwood of the Adam Smith Institute:

Phillip Inman, Guardian economics editor:

Anthony Evans, associate professor of economics at ESCP Europe Business School:

Mike Bird of City A.M:

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