LONDON (Reuters) - Bank of England Governor Mark Carney is unlikely to make many predictions for the coming year when he delivers his first keynote speech of 2016 on Tuesday.
Since taking over the central bank nearly three years ago, Carney has been wrong-footed on a number of occasions by the British economy’s twists and turns after the financial crisis.
This may prompt him to tread carefully when he speaks at the University of London.
In the most recent version of his favoured forward guidance policy, Carney said last July that a decision on when to raise interest rates would probably become clearer about now.
But the only thing that is clear is that the BoE will not start easing Britain off ultra-low borrowing costs any time soon.
“Right now it’s hard to forecast when interest rate hikes are coming in the UK. We have had a number of pretty big surprises which have buffeted the Bank,” Rob Wood, a former BoE economist who now works for Bank of America/Merrill Lynch, said.
“Forward guidance is a tricky thing. There is no crystal ball out there to say exactly where the economy is going to be in one or two years’ time.”
When Carney arrived at the BoE from the Bank of Canada in 2013, he brought with him a policy of giving guidance to investors and business on what was likely to happen with interest rates.
Backed by Chancellor George Osborne who was keen to find new ways of getting Britain’s economy out of its stagnation, it represented a big break from the more cautious, wait-and-see approach of his predecessor Mervyn King.
But Carney was forced into a quick rethink. He had said the Bank would not even think about raising rates until Britain’s unemployment rate fell to 7 percent - something that then took only a few months rather than the three years the BoE had forecast.
Then, in the summer of 2014, with Britain’s economy growing strongly, Carney warned investors that rates could rise sooner than markets expected, only for global oil prices to begin a tumble which pushed British inflation below zero and scotched any rate hike plans at the BoE.
CHANGING THE GOAL POSTS
As a result, some investors have voiced frustration at the Bank’s changing messages.
“The Bank of England has continually changed the goal posts for us as investors to try and decide how monetary policy is being decided,” Scott Thiel, a managing director at investment firm BlackRock, told reporters last month.
Others are less critical. “Forward guidance is obviously more at risk if you make it clear that you are close to pulling the trigger and then you don’t pull the trigger,” Mike Amey, a director with global bond firm PIMCO said.
“I don’t think we’ve ever got to that point in the UK.”
Now, as Britain’s economy heads into its seventh year of economic growth but with inflation still just a fraction above zero, Carney and his colleagues at the BoE are sticking to their longer-term guidance that when interest rates do start to rise, they will go up slowly and to a level lower than before the crisis.
It remains to be seen whether Carney gives a new steer on Tuesday about when that process might begin. In November he said he wanted to see annual wage growth of about 3 percent, among other factors, before feeling the time was right for the BoE to move. Recently, wage growth has slowed to about 2 percent.
“Partly it’s a case of once bitten, twice shy,” Philip Shaw, an economist with Investec, a bank, said. “But there’s also a great level of uncertainty which means the Bank can’t give clarity about when it might start to raise rates.”
Editing by Jeremy Gaunt
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