‘A landmark day for Mark Carney’: Investment experts react to forward guidance


The Bank of England will keep the base rate at 0.5 per cent until the UK’s unemployment rate falls below 7 per cent unless inflation spikes, governor Mark Carney announced today.

In the BoE’s first use of forward guidance it also announced it is prepared to add to quantitative easing while the unemployed rate remains above its desired level.

According to the Office for National Statistics, the UK’s unemployment rate currently stands at 7.8 per cent.

The BoE expects median unemployment to stand at 7.3 per cent over the next three years, the Inflation Report shows, meaning the base rate is likely to remain at its historic low throughout the forecast period.

Hermes Fund Managers chief economist for global government and inflation bonds Neil Williams

“Governor Carney is right to be cautious about the ‘sugar-rush’ recovery so far, and keeping his stimulus options, such as QE, on the table. At first glance, though, marrying ‘forward guidance’ on rates with a 2 per cent CPI target deferred another six to 12 months to the end of 2015 will worry some he is further subordinating inflation-control to growth considerations. The MPC’s choice of unemployment as a policy-yardstick also seems as much as ‘puzzle’ as the puzzle it has posed them trying to explain it so far. This experiment will be interesting, and it remains to be seen whether forward guidance ends up being more cosmetic than real, with little added impetus to growth.”

Royal London Asset Management economist Ian Kernohan

“The late 2016 guidance on stimulus withdrawal is more dovish than the market was expecting, although this is offset to some extent by the 7 per cent unemployment rate threshold, which is quite high, and the ’knockout’ caveats on inflation and financial stability. Expect greater focus on the monthly labour market report in general and the productivity puzzle in particular. The acid test of this new policy development will be the stability of interest rate expectations in the face of shifting economic news.”

Miton Asset Management fund manager George Godber

“Mark Carney has been very consistent in his message. He wants to give the private sector confidence to invest. CEOs and CFOs alike have all been fearful to undertake new projects in case by the time they are finished demand is not there for the product or service. Carney is likely to suggest he will do whatever it takes to give that confidence. Rates will be kept on hold, you will not see an increase on QE, and already as a tool it is becoming ineffective. He is aware monetary policy is essentially dead as tool. They are keeping their options open but it is important that we have to get used to a Bernanke-type of situation.”

Bestinvest managing director of business development and communications Jason Hollands

”For investors wanting to play the UK recovery theme, it is important to not lose sight of the fact that the link between the UK stock market and the domestic economy is only partial given the international earnings profile of companies listed on the London Stock Exchange. In fact some two thirds of FTSE 100 company revenues are earned outside of the UK so for investors wanting to achieve greater domestic exposure, it is necessary to fish further down the market cap spectrum, notably the mid-cap universe. However, before investors get carried away it is clear that parts of the UK equity market have priced in a lot of this optimism with the Mid 250 having reached a record high and average P/Es now at around 22x earnings, levels last seen in 2009 when valuations maxed out at 28x before slumping to 15x in early 2010.So, while the data is encouraging, it is important not to get carried away by exuberance and lose sight of fundamental value.”

Kames Capital fixed income manager John McNeill

“This is an environment of monetary activism, there are complementary policies of forward guidance, the asset purchase programme, which will be maintained at £375bn at a minimum and may be increased if need be, and the funding for lending scheme. The market is likely to price a slightly higher inflation risk premium for U.K assets, which should support index-linked bonds. However, this policy will depress term premium at the short-end of the gilt market. Therefore, short-dated yields are likely to remain low but the yield curve will tend to steepen.”

BlackRock head of retail for EMEA Alex Hoctor Duncan

 “Today was a landmark day as Mark Carney took centre stage and delivered his first inflation report, outlining his plans to improve the UK economy.  His desire to keep interest rates low is commendable but ignores the lost generation of savers. Many investors have parked their money in cash because of the instability and uncertainty of investment markets. But holding too much for too long is not a wise move when looking to save, given the erosive effects of long-term inflation. Especially as interest rates are unlikely to rise anytime soon. Therefore, as economic recovery remains weak and uneven, it may be time to reassess your attitude towards risk and consider the benefits that additional investments such as bonds and equities could bring. Now is the time to act.”

 IHS Global Insight chief economist Howard Archer

“At a time when improving economic activity could lead to a marked increase in expectations of when the Bank of England could start to tighten monetary policy, forward guidance is most likely to be an effective tool. [But] there is also the very real risk that inflation expectations could become significantly destabilised if the economy sees further marked improvement over the coming months, and consumers and the markets believe that the Bank of England will still keep interest rates down at 0.5 per cent until mid-2016.”

Rathbones chief investment officer Julian Chillingworth

“The striking thing about Mr Carney’s statement is the degree of rope that has been afforded to him in terms of a timeframe. This is a statement of ‘ifs’ and ‘buts’, but the threat of higher inflation still looms. The statement has undoubtedly been helpful for Chancellor George Osborne’s aim of boosting the feel-good factor and might encourage a mini housing bubble. But there is a distinct balancing act here between preserving the wealth effect and curbing the perception that the economy is growing too fast, thus risking higher rate expectations.”

Insight Investment senior portfolio manager David Hooker

”The conditionality waters down the message. Is there a strong relationship between unemployment and inflation in the UK. The evidence is at best mixed. An early exit from guidance could damage the credibility of the MPC and lead the market to price in a faster and larger interest rate cycle than would have been the case. The labour market statistics will now take an even more important focus for markets.”

JP Morgan Asset Management strategist David Lebovitz

”While the implementation of more explicit guidance was expected, today’s report will be negative for the Sterling and positive for equities and other risk assets. While the UK appears to be emerging from recession, it will still be important for investors to remain balanced, as this continues to be the best hedge against uncertainty in financial markets.”

Brandywine Global (a Legg Mason subsidiary) fund manager Regina Borromeo 

”It should continue to be supportive for high yield especially with recovery occurring and lending improving.  There has been stonger demand to UK high yield bonds recently considering the positive economic data. The UK is the second largest country allocation in the fund through our exposure to sterling credit and high yield. With benchmark rates remaining anchored for some time, the search for yield will continue, which will help support demand for higher yielding assets.”