BoE Change of Heart Tells of Uncertainty about Economy

The latest in a series of seemingly conflicting statements emerged from the governor of the Bank of England in an interview with the Sunday Times. Just days after delivering what the City took to be a “doveish” quarterly Inflation Report, Carney told the paper that the Bank might raise interest rates before growth in earnings caught up with inflation. That prompted speculation of an earlier rise in borrowing costs than the markets had been expecting and was enough to send the pound up on the foreign exchanges.

Carney has form for this sort of thing. The previous Inflation Report in May was seen as ruling out a rate rise before 2015, but in his annual Mansion House speech a few weeks later the governor said markets should take the possibility of a 2014 increase more seriously.

It’s possible Carney is keeping the markets guessing because the Bank itself is unclear about the real state of the economy. Threadneedle Street has been surprised both by the strength of growth and the weakness of pay over the past 12 months.

A second possibility is that Carney’s hint that rates could go up even while real incomes are still being squeezed is meant to forewarn the markets that the minutes of the August meeting of the Bank’s monetary policy committee, due out on Wednesday, will show at least one policy maker voting for dearer borrowing. It was clear from the Inflation Report that there is division on the MPC about the amount of spare capacity in the economy and the rate at which that slack is being used up.

via The Guardian

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