Carney turns dove in yet another BoE rhetorical U-turn

24th June 2014

BoE Testimony to Treasury Select Committee – 24/06/14

The Bank of England’s testimony to the Treasury Select Committee left money markets reeling from yet another whipsaw in policy outlook. After suggesting that rate hikes may happen sooner than expected in his Mansion House speech, Carney shocked the market with a far more dovish performance.

The latest U-turn in rhetoric from the Bank of England doesn’t represent a change in policy outlook and the consensus view still points to rate hikes this year. Instead, the testimony underlined the confusion evident in UK data prints and the resulting divisions in the Bank. The MPC members grappled to explain the contradiction between robust employment gains and strong nominal growth rates versus weak wages growth and benign inflation. The testimony shows that it is the top officials in the Bank that are the doves, and the rest of the Committee who are hawks.

Despite recognising that the UK economy has a lot more momentum than previously thought, Carney cannot shake the inconsistency of weak wage growth, which he believes proves the existence of spare capacity in the UK economy and justifies later rate rises.

With the data providing a head-scratching problem for the MPC, the outlook for UK monetary policy depends on how the individual members interpret what is going on in the economy. The divide between hawks and doves has never been more crucial and the overhaul of staff at the BoE has never come at a more unfortunate time; effectively throwing the outlook for the monetary policy into disarray.

While the members present at today’s hearing appeared dovish, the broad consensus in the latest Bank of England minutes was increasingly hawkish. Monetary policy will ultimately be decided by consensus at the Bank and not just three of its members. With the UK recovery in no danger of slowing, we can still expect the first UK rate hike in November this year.