Bank of England governor Mark Carney will be taking questions from the press after the release of the central bank’s latest inflation report. All eyes will be focused on any changes to the forward guidance
Rapidly moderating inflation – as measured by the CPI – and falling unemployment mean the BoE is facing a far more positive economic backdrop than many expected last quarter.
By Emily Cadman, with economics editor Chris Giles and economics reporter Clare Jones at the Bank of England
Carney is beginning his opening remarks after the BoE dramatically brought forward by 18 months the moment it expects unemployment to fall to 7 per cent, showing the sensitivity of its forward guidance on interest rates to changes in the economy.
The full inflation report is now available on the BOE website
The first question addresses how the guidance has changed radically – how can borrowers understand what is happening?
The MPC is “very comfortable” with the guidance we’ve put in place, says Carney
He repeats that they aren’t going to think about tightening rates until the previously stated threshold is achieved – and will be examining closely what has happened to productivity
Next question focuses on the squeeze on families – that while unemployment is falling, average incomes are stagnating – will the BoE act?
This morning the ONS said the UK jobless rate fell to 7.6 per cent in the first quarter. More here from the FT’s Brian Groom
For those of you who would like to hear Carney in real time, the live stream is available on the BoE website
Carney repeats that any change in interest rates is all about changes in the economic conditions. “We are not going to consider raising interest rates until that 7 per cent threshold is raised.”
When that threshold is reached, the MPC will take a decision on the conditions in the economy – but a rate raise is not inevitable once the 7 per cent level is reached
Carney: “The recovery has taken hold”
Analysis now in from economics editor Chris Giles:
“In its latest quarterly forecasts, the Monetary Policy Committee has forecast a 50-50 chance of hitting its 7 per cent unemployment threshold in the fourth quarter of 2014, a huge change from its August forecast that unemployment was likely to remain above the threshold until summer 2016.
Even though its forward guidance has been overtaken by events, the MPC maintained its policy stance in the Inflation Report that monetary policy was on hold for a long time still.”
What is the point of forward guidance?, asks Chris Giles at the press conference
Without forward guidance in August, Carney says the discussion would have been about whether the central bank was going to raise rates today – and that would have been foolish.
“By providing guidance we have shifted the discussion to a focal point around an unemployment threshold”
Carney is very clear about the 7% level:
“It is not a trigger, it is a threshold”
In from FastFT: the pound is making further strong gains after the Bank of England brought forward its guidance.
Sterling rose to a session high of $1.5991 as the markets reacted to the news. Beforehand, it was at $1.5920.
The focus from Carney this morning are all about what slack there is in the economy, and how UK productivity is improving. Very clear there will be no automatic rate rise if the 7 per cent threshold is reached.
What is normal in the new world? Carney is asked.
Focusing on the labour market, he picks out the high number of people who are working part time instead of full time, and the unemployment rate, that the UK is not yet back to normal.
We have a recovery focusing on household spending, which is not unusual, Carney says. He argues it is a recovery based on spending out of income, not a debt fuelled recovery. But, for this to be sustained there needs to be the prospect of real wage growth down the road.
On the housing market, he argues that transactions are still running below historical norms, and that needs to increase as part of the recovery.
Nice quote on housing bubbles, regarding London.
“We don’t make policy for inside the Circle line, we make policy for the whole of the UK”
See how the BoE’s forecasts have changed with this chart from Chris Giles. The top line is the current forecast:
This just in from Clare Jones from the press conference floor:
“The degree to which the MPC’s forecasts for unemployment have changed has prompted journalists – and no doubt others – to ask what exactly the point of forward guidance is. Mark Carney has responded by saying that without guidance, people would wrongly have expected rate rises now based on the strong PMIs. Deputy governor Charlie Bean followed that up by saying that guidance was about telling people that rates would not be raised based on growth rates, but on the amount of slack in the economy – for which unemployment is a proxy.
“That may be true. But guidance is also supposed to work by encouraging people to borrow and spend more now by offering them certainty on what will happen to rates in the years ahead. It’s difficult to see how guidance can have any impact here after the publication of today’s inflation report.”
Help to Buy is helping to support the recovery at the moment, Carney says. He adds as a broader point that it is his job to take government policy as given, and adjust policy around it.
And this from Chris Giles on the vexed question of forward guidance:
“Mark Carney has been struggling to explain the point of forward guidance at the inflation report press conference. The BoE thinks the 7 per cent unemployment threshold will now be reached far earlier (end 2014) than it thought in August (mid 2016).
“The market has taken this as a strongly hawkish report because the unemployment forecast has been revised so far.
“But just go back and think what would have happened had there been no forward guidance. An inflation report with downward revisions in inflation forecasts with upward revisions in growth forecasts would have been seen as dovish as the BoE saw less inflation in the outlook.
“In short – it wanted guidance to give it a dovish appearance. And it looks more hawkish than it is. A triumph.”
This chart is from the BoE report on the likelihood that inflation will be above forecast, showing a decline in the probability that inflation will be above 2 per cent target:
And here, from Chris again, on how its unemployment forecast has changed:
The BoE is also much more optimistic about the price level:
Carney is very cautious on risks in the housing market: “It is early days”, “we are analyzing the situation” – both repeated a number of times
And that’s the close of the press conference. We’ll be rounding up summaries on the key areas covered.
Clare Jones rounds up the mass of questions on the housing market:
A lot of questions on the housing market this morning. Carney is adamant that the BoE will not set policy based just on what’s happening in London. Policy is set for the UK, not what happens within the Circle Line, he says.
The governor reiterates that it is “early days” and that there is a “very broad range of tools” to address a housing bubble. Housing remains more affordable than at any point since the early noughties, he notes.
He acknowledges that boosting the supply of housing is a problem.
On the BoE’s “veto” on Help to Buy, he suggests that the Financial Policy Committee could use it ahead of the three-year timeline set by the chancellor. “We could give that advice at any point in time,” he says.
Carney flags that the Financial Policy Committee’s role is to guard against risks to financial stability. He mentions twice about the possibility of recommending the Prudential Regulation Authority looks at borrowing standards.
The main story from this morning is undoubtedly the big revision to the BoE’s forecast on jobless numbers. The MPC forecast a 50-50 chance of hitting its 7 per cent unemployment threshold in the fourth quarter of 2014, a huge change from its August forecast that unemployment was likely to remain above the threshold until summer 2016.
But Carney strongly maintained that the bank’s policy stance on interest rates will remain in place, saying that the 7 per cent level is a “threshold, not a trigger”.
We’ll have full coverage throughout the day on FT.com of the reaction to the change, as well as analysis, but we’re now ending this live blog. Good bye!