(UPDATE) The pound leapt as a shift in the Bank of England’s ‘forward guidance’ plans for interest rates left financial markets questioning how long rates would remain at rock-bottom.
UK unemployment will probably have hit the Bank’s 7% guidance threshold for raising rates this spring, but low productivity is likely to delay tighter policy, said governor Mark Carney as he attempted to convince consumers, businesses and markets that interest rates would remain at 0.5% until the recovery is sustainable.
In its Inflation Report, the bank pointed out that ‘robust’ economic growth had not yet begun to erase the UK’s economic productivity gap.
Having seen its attempts to steer rate expectations derailed by unexpected growth, the Bank refrained from providing specific numerical signposts for a rate rise. Carney instead outlined a range of measures that would be monitored.
James Knightley, an economist at ING Bank, said ‘the strength of the growth story coupled with the robustness of the labour market means that the BoE are likely fighting a losing battle in convincing markets that rate hikes are a distant prospect.’
The pound, flat before Carney spoke, was trading 0.5% higher at $1.6536. Share markets meanwhile remained positive (FTSE 100 up 0.2% at 6,685).
Fed ‘continuity’, China trade sustains FTSE winning streak (08:15)
Confirmation that the new chief of the US Federal Reserve won’t fiddle with existing stimulus policy, coupled with signs of improvement in China’s economy, helped global stocks higher, with London’s benchmark FTSE 100 heading for its sixth consecutive day of gains.
Although new Fed chair Janet Yellen confirmed to US Congress that the steady reduction of US asset purchases would continue, gradually removing the stimulus that markets crave, she provided the next best thing for investors: certainty.
The result of Yellen’s expectations of ‘continuity’ in monetary policy, ‘likely’ reducing the pace of asset purchases at each of the Fed’s policy meetings as it started to do in December, was a rally on Wall Street, followed higher by Asia overnight and Europe this morning. Britain’s FTSE 100, which rose 1.2% on Tuesday, was up 0.2% to 6,686.
China’s ‘rock-solid’ trade
It wasn’t just Yellen putting wind in European markets’ sails; an update on Chinese trade, showing growth in both exports and imports, helped counter concerns about the health of the country’s economy.
After a string of poor updates on China’s economy, markets welcomed a report showing exports grew 10.6% year on year in January, up from 4.3% in December. Imports grew by 10% from 8.3% in the previous month.
Though the result was ‘rock-solid’, according to Klaus Baader, economist at Societe Generale, he was among economists cautioning that the timing of China’s Lunar New Year celebrations last week put the accuracy of the report under question. Concerned about the sustainability of the rebound in China’s trade, economists at HSBC described themselves as ‘cautiously optimistic’ over the outlook.
Pound steady as policy change eyed
The British pound was steady at $1.6453 ahead of comments from Bank of England governor Mark Carney this morning in which he is widely expected to tweak his ‘forward guidance’ policy dictating when interest rates will rise.
An unexpectedly rapid decline in UK unemployment to 7.1% means the City expects Carney to backtrack on his plans to consider raising rates when the jobless level hits 7%.
Carney will deliver his verdict in a press conference after the publication of the Bank’s Inflation Report, alongside forecasts for inflation and economic growth.
Mario Draghi, the chief of the European Central Bank, also speaks publically on Wednesday.