Carney defends forward guidance after negative market reaction

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Bank of England governor Mark Carney has rejected criticism that his foreword guidance policy has pushed up borrowing rates, saying the main cause lies in the expected reduction in the US’s asset purchase programme.

Earlier this month, Carney said the Monetary Policy Committee will not consider lifting the base rate from its historic low of 0.5 per cent until UK unemployment fell below 7 per cent. The caveats were the 7 per cent threshold will not be used if there is a more than 50 per cent chance of inflation rising above 2.5 per cent over the next 18 to 24 months, or threats to financial stability emerge.

Gilt yields have advanced since Carney unveiled forward guidance on 7 August. Bloomberg shows 10-year gilts are currently yielding 2.75 per cent, up from 2.48 per cent when forward guidance was announced.

Speaking at a business leaders event in Nottingham, Carney accepted there had been a rise in long-term yields in advanced countries and that market interest rates had risen since the guidance was published but insisted forward guidance was not the cause.

He said: “The main common driver is speculation the US Federal Reserve will soon reduce the pace of its asset purchase. That has, not surprisingly, affected yields in other countries because safe, liquid sovereign bonds of the world’s largest economies are close substitutes for each other.

“In the UK, these movements have been reinforced by growing expectations of a recovery. As we explained at the time of the forward guidance announcement, a rise in the yields on long-terms bonds is consistent with our commitment to price stability and supporting the recovery.”

He said the date at which markets expect a rate rise has moved from the end of 2015 to mid-2015 and that one reason for this could be that they expect the 7 per cent employment threshold to be reached more quickly than expected by the Bank.

Carney said: “Since the aim of our policy is to secure recovery as quickly as possible, that would be welcome. But policy is built not on hope but on expectation. And we estimate there is only a one-in-three chance of unemployment coming down that quickly.”

In an effort to reassure borrowers about rates in the future, Carney said 70 per cent of household loans and 50 per cent of business loans are tied to the base rate and that will only be raised after “taking into account the strength of the recovery and the outlook for inflation”.

He said: “The upward move in market expectations of where Bank rate will head in future could, at the margin, feed into the effective financial conditions facing the real economy.

”If they tighten, and the recovery seems to be falling short of the strong growth we need, we will consider carefully whether, and how best, to stimulate the recovery further. Our forward guidance was clear that although we would not reduce the stimulus until the recovery is secure, we would if necessary provide more.”