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Bank of England dissent, robust jobs data raise low-rates doubts
Unexpected dissent from a Bank of England policymaker and robust jobs data cast doubt on Wednesday on the new central bank governor's flagship policy of keeping interest rates low, just a week after it was announced.
The BoE under Governor Mark Carney pledged to keep interest rates low until unemployment falls to 7 percent - which the bank forecasts will take three years - subject to certain safeguards including the inflation outlook staying in check.
But minutes of August's Monetary Policy Committee meeting released on Wednesday showed that one of the nine policymakers, Martin Weale, thought these checks were too loose, and separate unemployment data showed a sharp fall in benefits claims.
Ten-year gilt yields surged 5 basis points to hit a near two-year high as markets brought forward their expectations for a rise in BoE interest rates from their record-low 0.5 percent, though gilt prices subsequently recouped most of their losses.
"Before the ink is hardly dry on the forward guidance document there is someone saying they don't like the idea," said Brian Hilliard, UK economist at Societe Generale.
Weale, an external MPC member, voted against Carney's flagship policy because he feared it could push up medium-term inflation expectations. Other policymakers disagreed about whether recent changes in market interest rates were justified, and some were in favor of further asset purchases in future.
Britain's economy is gathering strength and looks set to build on the 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 labor 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 labor 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.
Last week the Bank of England joined a growing trend among central banks to commit to keeping interest rates low for an extended period, 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.
The MPC is not expected to vote regularly on changes to the guidance framework, and some analysts played down the significance of Weale's dissent.
"Given that Martin Weale has expressed doubts or concerns about such a policy in the past, it probably shouldn't come as a great surprise," said Commerzbank economist Peter Dixon.
Although several BoE policymakers had expressed skepticism 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 Monetary Policy Committee's August meeting.
Last month Carney 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.
August's minutes showed some unnamed policymakers still thought there was a strong case for more asset purchases, but that they would not vote for it until market reaction to forward guidance was clear.
Part of the aim of forward guidance is to push down short-term market borrowing costs in Britain's economy.
But even here, the MPC appears to be divided. While most MPC members said that the rise in British short-term market interest rates since May was not warranted by the economic outlook, others thought it might well be. In July's minutes, no division on this matter was apparent.
[Source: By David Milliken and Christina Fincher, Reuters, London, 14Aug13]
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