Mark Carney grilled on UK growth and interest rates: live – Telegraph.co.uk

The latest U-turn in rhetoric from the Bank of England doesn’t represent a
change in policy outlook and the consensus view still points to rate hikes
this year. Instead, the testimony underlined the confusion evident in UK
data prints and the resulting divisions in the Bank.

The MPC members grappled to explain the contradiction between robust
employment gains and strong nominal growth rates versus weak wages growth
and benign inflation. The testimony shows that it is the top officials in
the Bank that are the doves, and the rest of the Committee who are hawks.

Eimear Daly says the top officials in the Bank are doves, and the rest of
the MPC are hawks

Quote
Despite recognising that the UK economy has a lot more momentum than
previously thought, Carney cannot shake the inconsistency of weak wage
growth, which he believes proves the existence of spare capacity in the UK
economy and justifies later rate rises.

With the data providing a head-scratching problem for the MPC, the outlook
for UK monetary policy depends on how the individual members interpret what
is going on in the economy. The divide between hawks and doves has never
been more crucial and the overhaul of staff at the BoE has never come at a
more unfortunate time; effectively throwing the outlook for the monetary
policy into disarray.

While the members present at today’s hearing appeared dovish, the broad
consensus in the latest Bank of England minutes was increasingly hawkish.
Monetary policy will ultimately be decided by consensus at the Bank and not
just three of its members. With the UK recovery in no danger of slowing, we
can still expect the first UK rate hike in November this year.

12.37 New analysis just in from Trevor Greetham, Director of
Asset Allocation at Fidelity Worldwide Investment:

Quote
The hair of the dog that bit me” is an old saying that refers to the idea that
to cure a hangover it is best to drink a small measure of whatever caused
the trouble the night before. In some ways, this is the sort of medicine
Mark Carney has applied as governor of the Bank of England, encouraging
consumers to lever up their balance sheets into a rising housing market to
get the economy out of a recession that was caused by excessive private
sector debt.

There was a widespread belief Mark Carney’s first act at the Bank of
England would be to try to weaken the pound to boost a moribund economy.
Instead he issued powerful forward guidance that was widely reported as a
promise to keep interest rates low for three years. This, coupled with
direct government support for home buyers, triggered a strong housing-led
recovery.

The rest is history. The economy has grown by more than three percent. The
pound has in fact been one of the strongest major currencies, rising by more
than 10% against the dollar. And the markets are grappling with the
possibility of a base rate hike by Christmas. When Mark Carney came to
office people thought of him as a dove. At the Mansion House, less than a
year later, he was a hawk. This is the irony of forward guidance: if it is
effective, you end up breaking your promises.

There was a widespread belief Mark Carney’s first act at the Bank of
England would be to try to weaken the pound to boost a moribund economy,
according to Trevor Greetham

Quote
Carney’s next step will involve measures to restrict mortgage supply in an
attempt to cool the housing market. We are sceptical these measures will be
effective in the time frame required. We’re expecting base rates to rise and
the pound to stay strong, particularly versus the euro now the ECB is
heading in the opposite direction and easing policy.

At some point, tighter UK monetary policy and an uncompetitive pound will
come home to roost. The banks have cleaned up their balance sheets since the
mid 2000s, however, so the next economic slowdown will probably be painful
rather than disastrous. All the same, it is a sobering thought and the
Chancellor must hope the day of reckoning comes some time after the next
general election.

12.27 Eimear Daly, head of Market Analysis at Monex Europe, offered her
analysis:

12.21 An alternative take on today’s action:

Bank of England

12.00 Some analysis from Chris Williams, CEO of Wealth Horizon:

Quote
Despite its protestations, the Bank of England has significantly overestimated
the level of clarity that the market and consumers have on its strategy
around interest rates.

The MPC was initially taken aback by the degree of certainty from the
market as to when the first adjustment to interest rates might happen and
then the Governor appeared to U-turn on his Mansion House speech in the TSC
hearing. These actions are all symbolic of the mixed messages and confusion
being fed into the market.

The Governor has asked the country to focus on the medium rather than the
short term. Yet, markets can expect volatility when rates start to climb and
the average mortgage repayment could rise by hundreds of pounds a year. So,
understandably, retail investors and homeowners are unlikely to focus on the
medium term when even in the short term any rate rise will have a
significant impact for them.

These concerns need to be addressed. We need to ensure clarity of
expectations, something that the TSC was asking for, but I’m not sure that
is what the country is getting.

The Bank has significantly overestimated the level of clarity, says Chris
Williams

11.55 Here are some of the highlights from Carney’s appearance
today at the Treasury Select Committee:

MARKET REACTION TO DATA

Quote
What we’re trying to do is we’d like to see the market adjust to the data,
just as our opinions are updating. We hadn’t seen [that]. A short term
market for expectations of bank rates, that moves around with the data …
is a healthy thing.

PATH OF INTEREST RATES

Quote
As the economy progresses, the time to normalise interest rates is edging
closer, it’s coming closer. But what is most relevant is that those
adjustments will be to a level of interest rates, through a gradual process
that is likely to be materially lower than historic averages.”

Particularly with respect to the entrepreneurs and business people …
what’s most relevant to those individuals, as for households, is not the
timing of the first interest rate move but the expected path of interest
rates over the medium term.

MORE LABOUR MARKET SLACK THAN THOUGHT

Quote
What was weaker and notable was the wage data was softer than our expectations
and adds to a run of hard data around wages that has been softer than we had
expected.

The developments on the wage front suggest to me …. that there has been
more spare capacity in the labour market than we previously had thought.

MORE BALANCED RECOVERY

Quote
What has also happened is the economy has performed a little bit better in
terms of actual out turns but actually in terms of momentum, forward
indicators, has more momentum than we would have expected.

So the combination of the two, greater momentum in the economy … we have
to balance that against the possibility in my view that we could have more
spare capacity to begin with. There are signs that there’s more balance in
the recovery than previously.

STERLING STRENGTH

Quote
On the export side where the data is a bit choppy … there are still
reasonable challenges there given the weakness of demand abroad and the
strength of sterling, the recent strength of sterling which has not yet been
supported by improvements in productivity and competitiveness.

RATE HIKE TIMING

Quote
The exact timing of that [increases in interest rates] will be driven by the
data. But the most important aspect of the guidance that we’re giving is
that our view is that the increases in rates over the forecast horizon, in
our best estimation, will be limited and gradual.

INTEREST RATE LEVEL BEFORE STARTING QE SALES

Quote
My personal view [is that] I would expect it personally to be higher than 1pc,
yes.

DAVID MILES: LOTS OF SPARE CAPACITY

Quote
There remains a significant degree of spare capacity…consistently lower than
I had thought likely given what the headline unemployment number is.

I think there is a significant amount of slack there. I’m probably at the
upper end of the range that we talk about, 1 to 1.5 percent, I think it’s
quite plausible that there may be more spare capacity.

11.48 Here are some of the main points from today TSC hearing:

CARNEY UNDER FIRE FOR SENDING OUT MIXED MESSAGES

Carney came under fire from MPs for his seeming contradictions and
changes in tone about the timing of interest rate rises.

He was accused by MP Pat McFadden of behaving like “an unreliable
boyfriend
– one minute hot and one minute cold”.

The committee chairman Andrew Tyrie said that Carney was “giving a lot of
guidance” but “not all of it pointing in the same direction”.

INTEREST RATE WILL BE “LIMITED AND GRADUAL”

Carney said that the timing of a rates hike will be “driven by data”
adding that any rises will be “limited and gradual”.

Meanwhile, David Miles said that noise around whether the first interest rate
rise will come in December or March is “largely noise”

MANSION HOUSE SPEECH

Carney explained that he had wanted the markets to adapt to the data, and was “surprised”
that they had not prior to his Mansion House speech.

He said that his speech was aimed at correcting market belief that there was
only a low probability that interest rates would rise before the end of this
year.

11.32 The pound has slipped again after bouncing to $1.7010. It is now
trading against the dollar at $1.6995

The pound has slipped again against the dollar

11.28 The MPC members have now finished giving evidence evidence at the
TSC.

Now for some analysis. Howard Archer, chief UK and European Economist
at IHS Global Insight, said:

Quote
The testimonies of Mark Carney and other MPC members to the Treasury Select
Committee come across as pretty balanced regarding whether interest rates
could rise before the end of 2014.

Mr. Carney stressed that the decision on when interest rates will start to
rise will be driven by the data over the coming months and stated that he
expected market expectations to move in line with the data.

He indicated that his Mansion House speech when he said that interest rates
“could happen sooner than markets currently expect” was aimed at correcting
market belief that there was only around a 15% probability that interest
rates would rise before the end of this year.

Mr. Carney observed that the recent very low earnings growth data could be
a sign that there was more slack in the labour market than the MPC had
previously thought but he balanced this by observing that the economy looks
to have more momentum than had been expected.

11.20 David Miles said that noise around whether the first interest
rate rise
will come in December or March is “largely noise”

11.15 Carney is now being asked about the London housing market
by Theresa Pierce MP. Carney stuttered when she asked: “Do you think
there is a growing housing crisis in London?”

He said he can’t comment because he is on the Financial Policy Committee which
reports on Thursday and is expected to address possible curbs to cool the
housing market.

Carney added that the dynamics in the UK housing market are driven up by a
lack of supply relative to demographic demand.

Carney said that a limited supply of houses is London has been driving up
demand

11.03 Carney said that he expects some increase in volatility as
interest rates start to normalise.

Carney has been accused of giving out mixed message about the timing of
rate rises

11.00 Earlier, Pat McFadden MP accused the Bank of England of acting
like an “unreliable boyfriend”. Here is the response from the
economics editor of The Times:

10.55 Some analysts are not impressed by the answers given so far. Chris
Beauchamp,
Market Analyst at IG said:

Here’s the Sun business editor’s summary of what Carney said about the
markets:

10.50 Carney has said that markets expect the pace of tightening to be
half the previous pace, and that the Mansion House speech did not change
this.

10.47 The pound dropped after Carney appeared to contradict what he
said in his Mansion House speech about a rise in interest rates. However, it
is still trading around levels last seen in October 2008.

The pound dropped after Carney appeared to contradict himself Graph:
Bloomberg

10.45 Pat McFadden MP accused the Bank of “behaving a bit
like an unreliable boyfriend – one day hot and one day cold”.

Meanwhile, the economics editor of Sky News thinks that Carney is giving
confusing signals about when interest rates will rise.

10.40 Carney said:

Quote
With the wisdom of hindsight, what we got wrong was that we were on the upper
end of expectations on growth. We expected prod
uctivity growth to
pick up much more rapidly than it has.

He added that there is less spare capacity in the economy than he expected in
August of last year. The spare capacity is, however, being used up, he said.

10.35 More from Carney about the path of interest rates:

Quote
Particularly with respect to the entrepreneurs and business people … what’s
most relevant to those individuals, as for households, is not the timing of
the first interest rate move but the expected path of interest rates over
the medium term.

10.30 Carney is now being quizzed by MPs on his Mansion
House speech.

He said that he wanted the markets to adjust to the data, and that he and the
rest of the MPC were “surprised” that they had not done so prior
to the Mansion House speech.

10.26 Ian McCafferty has been talking about the state of markets.

Ian McCafferty is an external member of the MPC

10.25 Now for a quick spot of analysis from Jeremy Cook, chief
economist at World First foreign exchange said:

Quote
After the first 20 minutes of today’s appearance in front of the Treasury
Select Committee it is clear that Governor Mark Carney has decided to row
back some of the surprising hawkishness in his recent Mansion House speech.
Speaking 12 days ago, Carney said that home owners and businesses should be
prepared for interest rate rises and that the first of these “could
happen sooner than markets currently expect.

Today’s comments however have continued with a similar tone to his previous
communications in that spare capacity in the labour market will be difficult
to overcome, that wage pressures will come through eventually but remain
poor at the moment and, as a result, inflationary pressures are not an issue
at the moment. This lack of a normalising inflation expectation leads to a
lack of a normalising of monetary policy and hence the GBP weakness this
morning.

I said the day after the Mansion House speech that it seemed strange and
out of character. I can now add that it should be largely forgotten and I
maintain that interest rates will not rise in 2014 unless a notable increase
in real wages is seen.

10.20 Carney says that a gradual path of rate rises is more imporrtant
than the date of the first increase. This follows on from what he said
earlier about rate rises needing to be “limited and gradual”.

10.15 More highlights from Carney so far:

STERLING STRENGTH

Quote
On the export side where the data is a bit choppy … there are still
reasonable challenges there given the weakness of demand abroad and the
strength of sterling, the recent strength of sterling which has not yet been
supported by improvements in productivity and competitiveness.

RATE HIKE TIMING

Quote
The exact timing of that [increases in interest rates] will be driven by the
data. But the most important aspect of the guidance that we’re giving is
that our view is that the increases in rates over the forecast horizon, in
our best estimation, will be limited and gradual.

10.10 Some highlights of the TSC hearing so far, from Reuters:

MARK CARNEY: MORE LABOUR MARKET SLACK THAN THOUGHT

Quote
What was weaker and notable was the wage data was softer than our expectations
and adds to a run of hard data around wages that has been softer than we had
expected.

Taken in isolation the continuation of development on the wage front
suggest to me … that there has been more spare capacity in the labour
market than we previously had thought.

DAVID MILES: LOTS OF SPARE CAPACITY

Quote
There remains a significant degree of spare capacity…, consistently lower
than I had thought likely given what the headline unemployment number is.

I think there is a significant amount of slack there. I’m probably at the
upper end of the range that we talk about, 1 to 1.5 percent, I think it’s
quite plausible that there may be more spare capacity.

10.00 Carney is talking about earnings.

He said:

Quote
We expect that there will be a pick up in earnings and there to be real
earnings growth.

He explained that there has not been an acceleration in earnings, but there is
some survey data that this could be about to happen. “The degree to
which it happens remains to be seen,” he said.

He says is the notable that the latest wage data is softer than the Bank’s
expectations. Wage developments suggest there is more spare capacity in the
labour market than previously thought. However, productivity is increasing
and he expects this to feed through into wage growth.

9.55 Carney is speaking again. He says interest rate rises will
be “limited and gradual”. He added: “The exact timing will be
driven by the data”.

9.50 Charlie Bean is now speaking about spare capacity.

Charlie Bean is the Deputy Governor of the MPC

He said:

Quote
As far as I am concerned my central estimate is 1 to 1.5; there is
considerable uncertainty. The wage data, certainly that is consistent with
there being more slack in the market.

9.45 Mark Carney is giving his views on the “productivity puzzle”.
He said that it is notable that latest wage data are softer than our
expectations and “adds to a run of hard data that has been softer than
expected.

He added that wage developments:

Quote
Suggest, to me, that there has been more spare capacity in the labour market
than we previously had thought, all things being equal.

But what has also happened is that the economy has performed a bit
better… with more momentum that he had expected.

09:36: The session has started – a little later than expected.
Andrew Tryrie, chairman of the TSC, opens by thanking Sir Charles Bean, the
outgoing BOE Deputy Governor, for his years of public service.

He wants’ to know if Sir Charles would be willing to put down in writing his
thoughts on his time at the Bank. Sir Charles says he would prefer a time
gap of around a year to allow his successor time to settle in and for him to
collect his thoughts.

9.32 James Sproule, Chief Economist at the Institute of Directors,
said:

Quote
In normal conditions the Bank of England would try to anticipate what
inflation would look like over the next couple of years and set interest
rates accordingly. However, the Bank has made it clear that monetary policy
over the past few years has been far from normal.

Ultra-loose policy successfully lessened the impact of the recession, but
as the recovery takes hold it will soon be the time to start taking interest
rates to a level where monetary policy can once again become an effective
economic lever. Ideally this rise in interest rates will be achieved
gradually, starting in the autumn of 2014, with an aim of reaching a more
normal level, perhaps 3%, by autumn 2015.

Assessing rate rises on the basis that inflation is projected to stay low
misses the point. Monetary policy must be put back on a more normal footing
first, and then we can monitor inflation to see if further action is needed.
Some have also argued that we need to keep rates low to stop the pound
strengthening further, but monetary policy should not be used to target
exchange rates.

But Mr Sproule added that:

Quote
Concerns about an inflating housing bubble are not the primary factor behind
the need to raise rates. Worries about the housing market are limited to the
South East of England and it makes no sense to set monetary policy for the
whole of the UK based on one sector of the economy in one region. The
housing market is much better controlled through Bank of England tools, such
as bank guidance on loan to income ratios.”

As long ago as December 2013, many IoD members were anticipating an
interest rate rise in 2014, with 46% thinking such a move to be likely and
just a third of members considering it unlikely.

9.25 Let’s take a look at what the analysts predict, ahead of Carney’s
appearance at the TSC. Here is Nick Beecroft, Saxo Capital Markets’
senior market analyst:

Quote
I think we can expect Carney to mount a robust defence of the Bank’s Forward
Guidance fiasco, which has unfolded like a slow motion train crash over the
last few months.

First we had a threshold, (7pc unemployment), then we didn’t, first we were
told that rates would be low for ever and now we are told that the
‘relatively low probability attached to a Bank rate increase this year
implied by some financial market prices was somewhat surprising’!

He runs the risk of ‘protesting too much’, and should adopt and adapt
Former British Prime Minister Harold Macmillan’s philosophical retort when
asked the most difficult challenge he faced, ‘events, dear boy, events’. He
is on dodgy intellectual ground and the sooner he can quietly consign the
ill-conceived Forward Guidance folly to history, the better.

9.20 Just to recap: In the May inflation report,
the Bank of England signalled that interest rates would remain at a record
low until next year
, as policymakers judged there was enough room
for the economy to grow without pushing up inflation.

But Carney signalled a change of tone in his Mansion
House speech on June 12
, when he said he believes a rise in interest
rates “could happen sooner than markets currently expect”,
possibly even later this year.

Mark Carney, giving his Mansion House Speech

Mr Carney said:

Quote
This decision [on interest rates] is becoming more balanced. It could happen
sooner than markets currently expect.

The Bank rate has been at a record low of 0.5pc since 2009 to encourage
spending and investing.

However, economists blame low interest rates as a prime cause of rising house
prices, while the economy is now growing faster than that of any other
developed nation.

Less than a week after that Mansion House speech, it emerged that Bank
of England rate setters expressed “surprise”
that markets
were unprepared for the possibility of an interest rate rise by the end of
this year at their last policy meeting.

The minutes of the June 4-5 meeting stated:

Quote
The relatively low probability attached to a Bank Rate increase this year
implied by some financial market prices was somewhat surprising.

9.20 After the minutes were made public, Vince Cable, the
Business Secretary, warned
that an early rise in interest rates could put the economic recovery in
jeopardy
.

Vince Cable strikes a more dovish note with interest rate hikes

Mr Cable said:

Quote
If these incipient inflationary pressures lead to a rise in interest rates
sooner and further than is warranted by the economy as a whole, it could
place in jeopardy our hopes for a sustained and balanced recovery.

9.10 Good morning. Welcome to The Telegraph’s live coverage of Mark
Carney
, the Governor of the Bank of England, who will be giving evidence
at the Treasury Select Committee (TSC) from 9.30am. He will be quizzed by
MPs on the latest inflation report.

Mr Carney will be joined by fellow MPC members:

Charlie
Bean
, Deputy Governor of the Bank of England
Ian
McCafferty
, external MPC member
David
Miles
, external MPC member

Mark Carney grilled on UK growth and interest rates: live – Telegraph.co.uk

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