M&G’s Leaviss: Why don’t the markets believe Carney?

BoE governor Mark Carney

M&G fund manager Jim Leaviss says the Bank of England’s poor inflation predictions have undermined governor Mark Carney’s forward guidance.

Writing in M&G’s Bond Vigilantes blog, Leaviss indicates the BoE’s “awful” inflation predictions in the past as a point of contention for the market.

As a result, the gilt market has experienced a sell-off, contrary to what the BoE had hoped for. Since Carney ushered in forward guidance at the beginning of August, 10-year UK government bond yields have risen from 2.48 per cent to 2.80 per cent. 

The Bank’s forward guidance, introduced in August’s Inflation Report, said it will not consider lifting interest rates until unemployment falls to 7 per cent. However, a number of caveats, including a rise in the BoE’s inflation outlook, means the Bank could deviate from this plan.

Earlier this week, Carney made a speech addressing the much-discussed caveats in a bid to improve clarity over the Bank’s likely monetary policy direction.

However, Leaviss says: “Carney’s attempted rollback from the ‘knockouts’ stated in the Inflation Report was not strong enough.

“Of course, the BoE can forecast inflation to be whatever it likes over the next 1.5 to 2 years. Its inflation forecasts have famously been awful for years, always predicting inflation would return to 2 per cent when it always was much higher than that.

“But it will be important for Carney to earn some credibility here in the UK, and the days of the Inflation Report’s ‘delta of blood’ inflation forecast always showing a mid point for future inflation of 2 per cent must surely have ended when Mervyn King left.”

As a result, Leaviss expects it will take time for the market to believe Carney’s inflation prediction and that the gilt and currency markets will need “something stronger”.