Robust jobs data and unexpected dissent from a Bank of England policymaker created fresh doubts on Wednesday 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 Chancellor 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 Wednesday’s labour market data confirmed this.
Although Britain’s unemployment rate held steady at 7.8 percent in June, a sharp fall in jobless benefit claims in July pointed to a strengthening labour market.
The Office for National Statistics said the number of people claiming jobless benefit fell by 29,200 last month – almost twice the drop analysts had forecast.
The claimant count has now fallen for nine consecutive months, taking the rate to its lowest in more than four years.
The Bank of England’s announcement last week that it would join the trend among central banks to commit to keeping interest rates low for an extended period was subject to several caveats – the extent of which surprised some in the markets.
One of these was that the central bank would consider raising interest rates if it judged inflation in 18-24 months was likely to reach 2.5 percent – a timescale that Weale believed was too long.
“(Weale) saw a particularly compelling need to do more to manage the risk that forward guidance could lead to an increase in medium-term inflation expectations, by setting an even shorter time horizon,” the minutes said.
The British central bank’s long-term goal remains to return consumer price inflation to 2 percent, without causing unnecessary volatility in growth. Inflation has exceeded 2 percent since December 2009, and is currently 2.8 percent.
Weale said he accepted the principles of forward guidance, however, and that he would form his future judgments based on the framework adopted by the majority.
Although several BoE policymakers had expressed scepticism about some forms of guidance on interest rates before Carney’s arrival, most economists had expected Carney to be able to build consensus at the August meeting.
Last month he succeeded in persuading two MPC members – Paul Fisher and David Miles – to drop their long-standing call for more asset purchases with newly printed money, pending a decision on forward guidance.
But August’s minutes showed some unnamed policymakers still thought there was a “compelling” case to add to the 375 billion pounds ($580 billion) of bond purchases, although not voting for it until market reaction to forward guidance was clear.
Since last Wednesday, 10-year gilt yields have risen by 15 basis points and two-year yields are up 6 basis points – the opposite move to what the guidance policy was meant to bring.
But even here, the MPC appears to be divided. While most MPC members said that the rise in British short-term market interest rates between May and August was not warranted by the economic outlook, others thought it might well be. ($1 = 0.6468 British pounds)
daily alternative | alternative news – Bank of England dissent and robust jobs data fuel interest rate doubts