Carney makes impact with MPC note


Mark Carney

New Bank of England governor Mark Carney made an immediate impact as policymakers appeared to hint that interest rates would remain at their historic low for some time.

Shares rose 3% on the FTSE 100 Index while the pound fell as the Bank's Monetary Policy Committee (MPC) said in a note that expectations of a rate rise to come next year were "not warranted".

The stock market surge was further boosted by European Central Bank chief Mario Draghi's explicit commitment that its 0.5% interest rate would remain the same or lower for "an extended period of time". The language from Threadneedle Street was more muted but still caught markets unawares.

In a widely expected announcement, the MPC held rates for now at 0.5% and left the £375 billion quantitative easing (QE) programme of pumping money into the economy unchanged.
But the rare step of issuing a statement alongside its no-change decision - described as "pretty aggressive stuff" by one economist - took the City by surprise, coming just four days into Mr Carney's tenure as governor. It appeared to be the first move towards a policy of "forward guidance" to reassure markets that interest rates would remain low in the future.

Markets had brought forward expectations of a rise to autumn 2014 after recent positive economic data but the statement appeared to push that back. It indicated that these forecasts looked premature and that recent positive data had merely been consistent with the Bank's existing expectations. The MPC said: "In the committee's view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy."

Mr Carney, widely seen as an activist on monetary policy, is predicted by many economists to push eventually for a rise in quantitative easing from its current level of £375 billion to lift the UK decisively out of the doldrums. Recent data revisions by the Office for National Statistics showed that gross domestic product was lagging further behind its pre-recession levels than previously thought.

But pressure on the governor to take immediate action to achieve "escape velocity" and reach sustained growth has been eased by a hat-trick of positive updates this week from the services, manufacturing and construction sectors, with growth widely expected to improve in the second quarter of the year.

However, the statement appears to be a first hint of the Canadian's determination to take further steps to boost the economy in the future.

Vicky Redwood of Capital Economics said: "Although the Monetary Policy Committee left interest rates and quantitative easing unchanged at new governor Mark Carney's first meeting today, it took the first step towards introducing some sort of guidance on the future path of interest rates. We expect the committee to go even further at August's meeting and introduce a more formal form of guidance."

© 2013 Press Association