July 4, 2013 / 1:44 PM / 4 years ago

UPDATE 3-Bank of England steers markets on rates at Carney debut

* BoE: markets are pricing in too fast a rise in UK rates

* Carney, at first rates meeting, takes steps on guidance

* Bond yields and pound slide, share prices rally on news

By William Schomberg and David Milliken

LONDON, July 4 (Reuters) - The Bank of England warned investors on Thursday they were being too quick to bet on higher interest rates as new governor Mark Carney began to deploy his favoured strategy of giving guidance on the policy path ahead.

Just four days after the Canadian took over at the British central bank, he surprised markets by persuading fellow policymakers to issue a statement to show it was in no rush to raise rates, given Britain’s weak economic recovery.

“The implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy,” the Monetary Policy Committee said, showing its concern about a recent jump in bond yields in financial markets.

As expected, the MPC voted to leave monetary policy unchanged this month.

Sterling slumped and British share and bond prices rose after the statement, which also suggested that more detailed guidance on monetary policy might come as soon as next month.

“Expectations have been stoked for a sea-change in UK monetary policy,” economists at Fathom Consulting wrote in a note to clients. “Today may mark a significant new tactic on the part of the MPC - the use of forward guidance.”

Carney’s advocacy of long-term guidance while he headed Canada’s central bank was part of the reason why British finance minister George Osborne hired him to succeed Mervyn King.

In 2009, the Bank of Canada under Carney as its governor said it would keep interest rates low for more than a year in an attempt to give more confidence to businesses and households as the financial crisis hammered the global economy.

Guidance on interest rates - which has been used by the U.S. Federal Reserve since 2009 - is believed by many economists to help boost confidence when interest rates can go no lower and the effect of further bond purchases may be waning.

Barely an hour-and-a-half after the BoE’s statement, the European Central Bank also broke with tradition and committed to keeping interest rates low “for an extended period”.

The BoE’s statement did not go so far and how firmly it commits itself to keep rates low is likely to be the subject of vigorous debate on the MPC in the coming weeks.

David Miles - an external member of the MPC who has consistently advocated more bond purchases - said in January that he did not think it would be helpful for policymakers to tie their hands several months in advance.

Detractors of extensive forward guidance say it can commit a central bank to policies which are either implausible or will in future seem foolish - especially at times of market uncertainty.

Osborne has asked Carney to report back on the case for forward guidance - and how it could be implemented - by Aug. 7 and Thursday’s statement said this would “have an important bearing” on the MPC’s policy discussions that month.


For now, Carney seems to have kept the peace on the MPC. Its statement on rising bond yields on Thursday is consistent with concerns voiced at the final policy meeting chaired by King last month.

A recent run of better-than-expected data had helped push up borrowing costs in financial markets on hopes that the British economy is finally on the mend after two years of stagnation, and five years after the financial crisis struck.

Yields on gilts, like those on other government bonds, have also risen sharply after Ben Bernanke, chairman of the U.S. Federal Reserve, spelled out in June a possible timetable for the U.S. central bank to reduce and then end its bond-buying.

Thursday’s statement had an immediate effect on gilt prices and related assets.

Markets are now pricing in the bank’s next interest rate rise for the second half of 2015, rather than in the first half as thought before Thursday’s announcement, said Moyeen Islam, a fixed-income strategist at Barclays.

Some economists said the statement might also herald a restart of bond-buying by the central bank under Carney.

“It’s a cert there’ll be guidance in August, and then the question is whether there will be asset purchases as well,” said David Tinsley, an economist at BNP Paribas.

Investors will have to wait for nearly two weeks to find out if Carney himself voted for more bond buying on Thursday.

At recent MPC meetings, six policymakers have voted against more stimulus and only three have voted in favour, including King who retired as governor last week.

Minutes of this week’s meeting will be published on July 17.

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