Explicit wording sought to jolt market expectations, says Carney

The Bank of England was unusually explicit in its communications ahead of the November rate hike, as it sought to wake up markets to the signals it was trying to send, Mark Carney said today (February 21).

The monetary policy committee (MPC) had a long discussion over the appropriate wording, the BoE governor told the UK’s Treasury Committee. MPC members felt the financial markets had been too subdued and were not correctly pricing in the likelihood of a rate hike.

Market participants “couldn’t conceive” of a rate hike during the UK’s Brexit negotiations, Carney said – a view the BoE tried to dispel through several documents and speeches by senior officials. In the event, on November 2, the BoE raised the policy rate by 25 basis points to 0.5%, with the committee split 7-2 on the decision.

The wording released ahead of the decision certainly did not tie the BoE’s hands, but it was about as close as a central bank ever came to committing to a rate hike.

“A majority of MPC members judge that… some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target,” the BoE said in the minutes of its September policy decision.

“It was a fairly direct message,” Carney told the committee today, adding that the BoE never wants to “pre-commit” to a rate hike. He said the signal was due to the “exceptional circumstances” surrounding Brexit and the central bank would probably be less explicit about further hikes.

A majority of MPC members judge that… some withdrawal of monetary stimulus is likely to be appropriate over the coming months to return inflation sustainably to target

Bank of England

The action seems to have worked, the governor said – “financial markets have started to move with the underlying data”. Current market pricing indicates the BoE is likely to make three rate hikes this year.

Carney appeared alongside fellow MPC members Andrew Haldane, Silvana Tenreyro and Ben Broadbent. All of the committee members stressed that future decisions would be conditional on the data and noted developments on Brexit would probably have a significant impact.

Data released by the UK’s Office for National Statistics today could make uncomfortable reading for the MPC, which has focused on a narrative of diminishing slack in the economy and the likely re-emergence of real wage growth later this year. Unemployment rose 0.1 percentage point to 4.4% in the three months to December, while wages continued to grow more slowly than prices.