This week, at a House of Commons hearing, Bank of England Governor Carney withstood a barrage of questions from some rather irate Members of Parliament (MP). The Governor was criticized for sending mixed signals with respect to his position on rate hikes. When it was first introduced, the Bank’s Forward Rate Guidance (FRG) implied the first rate hike would not be until 2016. Whilst improving economic data has shifted the expected date into 2015, the recent Mansion House speech led many, including ourselves, to bring the expected timing of the first Bank rate hike even closer; to November 2014 (from early 2015). Nonetheless, we think an MP likening Carney’s forward rate guidance to the assurances of an ‘unreliable boyfriend’ is somewhat unfair.
It’s better to be lucky than good. When Carney took over from Mervyn King as Governor on 1 July 2013, the UK was stumbling along after a double-dip recession and there were expectations of even a triple-dip floating around the market. Less than a month into his term and the second ‘dip’ of 2011/12 had been revised away. With growth of 3.1% YoY in the first quarter of this year (and four quarters of above trend growth of around 0.8% QoQ), we can smugly brush aside the triple-dip thoughts of early 2013. Furthermore, while the housing market recovery suffers from regional disparity, concerns of an unbalanced recovery need not be exaggerated, with regional Purchasing Managers Indices (PMI) showing a recovery that appears to have a stable footing (see chart). The components of the recovery are also looking more balanced as strength in investment now contributes to what has predominantly been a period of consumption-led growth.
Timing is everything. When Carney walked into the Bank, inflation had just reached a local peak of 2.9% (June 2013), well above their 2% target, but it has fallen continuously since to 1.5% in May this year; allowing the MPC to meet and then fall below their inflation target for the first time since 2009. The labor market has not been left out either. The unemployment rate has fallen from 7.8% in June 2013 to 6.6% now, and looks likely to drop below the Bank’s 6.5% year-end forecast.
With this in mind, market participants should not be surprised to see a more hawkish tilt from the Monetary Policy Committee (MPC). Over the past month, MPC speeches have continued to emphasize conditionality of FRG on the evolution of economic data, the ‘slow and steady’ approach to rate hikes, and some airtime has been given to the idea that this approach warrants an earlier start. Carney’s Mansion House speech aggregated these views.
Whilst we must not give all the credit to Carney given the slow-moving nature of economies, the turnaround in the first year of his tenure has exceeded even the most optimistic forecasts. Carney should be forgiven for adapting his stance to reflect the underlying economic truth as he turns the MPC’s focus towards the difficult decision of when to raise rates off their ‘life support’ levels. Some may refer to Carney’s communication of FRG as being akin to that of an “unreliable boyfriend”, but we prefer to interpret them as those of a devoted Doctor.
Strengthening in activity is broad-based across regions