The Bank of England Governor Mark Carney has increasingly warned the markets that Britain’s main interest rate will rise from its record low of 0.5% soon.
The interest rate has been at that level since 2009.
But Dominic Rossi, the global chief investment officer of equities at the world’s second largest fund manager, Fidelity, told the BBC in an interview that Carney is being “too aggressive” when it comes to suggesting when there will be a rate hike — and is confusing markets.
What Rossi says is a big deal because Fidelity looks after $5 trillion in assets, including people’s investments and pensions.
He also criticised Carney for the use of “forward guidance” which was only introduced when he took the governor job at the BoE in July 2013.
“I think part of that criticism is about the whole case for forward guidance given the fact we live in a world which is highly unpredictable and where external forces can derail your economic forecasts pretty quickly,” said Dominic Rossi to the BBC.
“The Bank of England’s inflation forecasts have been poor and therefore the guidance towards interest rates has been too aggressive at times and I think the fact the bank is now rolling back from yet another interest rate forecast illustrates the point.”
Forward guidance is when the BoE forecasts what economic trends will happen in the future and then suggest when interest rates are most likely to rise.
The BoE has already been caught short on this after saying that rates are likely to rise when the unemployment rate fell under the 7% threshold.
The UK unemployment rate is currently at 5.1% — its lowest level since 2006. Carney at the central bank have blamed weak wage growth for the lack of a rate rise.
In July last year, Carney even said that the BoE is looking to raise interest rates “at the turn of this year.”
“Short term interest rates have averaged around 4.5% since around the Bank’s inception three centuries ago,” said Carney in a speech on July 16.
“It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historic averages. In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”
Again, this did not materialise.
However, last month economist Robert Wood, and his team at Bank of America Merrill Lynch, said that the UK is poised to not only raise rates by November 2016, but the Bank of England is also probably going to hike rates three times in 2017.
Unless the data turn up dramatically in the next couple of months, we think the hurdles to a May hike are too high now. So we expect the BoE to hike rates for the first time since the financial crisis in November 2016 rather than in May.
We stick with three hikes in 2017. A potential shift in BoE strategy to lower for longer would mean, if our relatively optimistic outlook turns out to be right, faster subsequent hikes. But we assume deployment of macroprudential policy tools could take a little of the pressure off rate hikes.
So later on Thursday when the BoE releases its inflation report and its interest rate decision, it’ll be interesting to see if the goal posts for a rate rise move again.
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