Yesterday, Mark Carney, the Government of the Bank of England, set out further guidance on its forward guidance (i.e. not considering raising interest rates until, or after, the unemployment rate fell below 7.0%).
Forward Guidance was intended to provide markets, businesses and consumers that interest rates wouldn’t be going up any time soon.
The rapid fall in the unemployment rate to 7.1% effectively killed off that strategy (though the BoE claim it was effective).
But as Ed Conway from Sky points out, market expectations are for interest rates to begin rising in spring 2015. Or just before the May 2015 election.
(In fact the May 2015 MPC meeting had been scheduled for the 6th & 7th May 2015, and has been pushed to the 8th/11th of May because of the election!)
This morning, the Bank of England’s Chief Economist Spencer Dale called such expectations reasonable. On Radio 5 this morning, he said that market forecasts for interest rates:
“remaining on hold until about the Spring of next year and then rising to around 2 percent by the end of 2016 and on that forecast, on that basis, we have a forecast in which the economy looks pretty good. Based on what we know now, that profile for interest rates looks reasonable.”
But Central Banks (the US Fed in particular) are loathe to change rates in the run up to an election for fear of being seen to play politics.
So interest rates are unlikely to go up before June 2015, making Dale’s expectations unreasonable from a political perspective.
