Officials at both the US Federal Reserve and the Bank of England are going out of their way to avoid increasing interest rates, which is forcing them to make enhancements to their forward guidance on when rates will go up.
When the Fed did finally cut its monthly bond purchases by $10bn, US markets forgot all about tapering fears and rallied strongly.
Why? Because of enhanced forward guidance, with the Fed essentially moving further away its goalposts for when it will raise rates.
The statement from the Fed’s December meeting also noted that it would not raise rates even if unemployment fell below the 6.5% threshold. This reflected both ultra-low inflation and the low participation rate in the US labour market.
BoE to follow suit
We expect Bank of England Governor Mark Carney to also re-iterate his version of forward guidance, potentially moving the Bank’s current unemployment threshold of 7% down to 6.5%, bringing it in line with the Fed.
Why such a dovish stance? Bank lending is weak – credit growth remains negative in the UK and is at very low levels in the US.
Expect more forward guidance justification as a theme for 2014. We think bonds can hold their ground in this dovish environment, which also remains positive for risk assets.
