During the hearing today Carney said there was still ‘wasteful spare capacity’ in the UK which needs to be absorbed by the economy before interest rates are normalised. He explained that wage and productivity growth has not seen the same level of improvement as GDP and employment numbers.
The remarks contrast somewhat with his last public speech and seem to be a clear attempt to restrain expectations of a rate rise coming before the end of the year and the upward pressure that has put on the UK pound.
Carney’s Mansion House speech on 12 June was generally considered his most hawkish since he began the role with the Canadian saying a rate rise could come ‘sooner than the market expects’ and the pound rallying the next day.
Many forecasters took the comments to mean a rise is likely in late 2014 or early 2015, having considered mid or late 2015 as more likely until that point.
The Bank of England governor is acutely aware that his words are equally if not more important than his actions in terms of market sentiment and has been engaged in a policy of influencing the economy through his communications since he took up the post.
He alluded to this in today’s appearance by acknowledging that he fully expected markets to tighten in response to the Mansion House speech.
“That speech brings to mind Mervyn King’s Maradona comment,” said Rathbones fixed income manager Bryn Jones. "When the rate rise does come it will not be large, it may even be less than the expected quarter point,” he added.
Speaking in 2005 former Bank of England governor King noted that monetary policy has certain similarities with a run by Argentina’s most famous son in the 1986 World Cup. During a match with England Diego Maradona beat a number of opposing players and was able to score a goal despite running in a straight line with the ball. The key, as with Carney’s tenure at the Bank of England, is that players reacted to what they expected he was going to do rather than what he actually did.
