Mark Carney said that the Bank of England’s forecasts and plans remain relatively unchanged since the last update, despite the ongoing acceleration of growth in the UK economy and falling unemployment.
This may indicate that markets have moved ahead of the BoE in terms of where assets have been pricing relative to inflation and interest rates, according to some financial sector observers.
“Investors are right to prepare for the first rate rise in the UK, which currently looks set to happen before the first official interest rate rise in the US, but the lesson of today’s press conference is that the markets have got a little ahead of themselves in pricing in a rate rise at the turn of the year,” said Stephanie Flanders, chief market strategist, UK and Europe at JP Morgan Asset Management.
Flanders also noted that Carney appeared to be warning investors not to count on the present low levels of volatility continuing or take the view that market expectations will dictate the Bank of England’s actions.
“[The BoE is] not going to be forced down this path by the sheer weight of market expectations,” she said. “As the economy – and policy – started to move toward normality, Carney said investors should expect volatility to get back to normal as well,” she added.
“Mr Carney is doing his best to prolong the period of negative real interest rates to ensure that the economy transitions to a healthy level of growth,” said Jeff Keen, director at Waverton Investment Management. “But to achieve that growth the MPC appears to be taking some risks with inflation which are not being priced into conventional bonds; both government and high grade corporates,” he added.
The CBI has also chimed in on this morning’s events to warn that the economy is not yet back under ‘normal’ conditions and there are reasons for investors to exercise caution.
“It was good to hear the governor confirm that a decision to increase interest rates would be based on the sustained strength of the wider economy, and there is still some way to go to reduce slack and boost productivity and wages,” said John Cridland, CBI director-general. “It is evident that growth is still not back to normal, and there are a number of political risks on the horizon,” he added.
