Mr Carney did his best to strike a fairly dovish tone despite scrapping threshold-based forward guidance and despite revising the growth forecast significantly higher and the unemployment rate forecast significantly lower.
Thus, Mr Carney basically said that the first rate remains some time away, that rates will be raised gradually, and that the new normal for the Bank rate will be low. Moreover, the size of the Asset Purchase Programme will remain unchanged until the first rate hike, which means that reinvestment continues.
Still, there is no denying that the UK is doing much much much better than expected. The BoE now sees growth at 3.4% in 2014, 2.7% in 2015 and 2.8% in 2016, roughly half a percentage point higher in each year compared with the November inflation report. And, still, the BoE sees inflation close to target in the coming years.
In terms of guidance, the BoE now forecasts a number of variables and set a number of broad guidelines. Boiling it down, however, Mr Carney said that medium-term equilibrium unemployment is 6-6.5%, which is probably roughly where the unemployment should be before rates will be hiked. In its new projections, the unemployment rate will reach this range early next year, which fits fairly well with current market pricing.
Thus, all in all, Mr Carney struck a fairly dovish tone, perhaps to prevent markets from overreacting to scrapping threshold-based forward guidance. The current market pricing of the first rate hike around spring 2015 seems fairly early, in our view, but more or less in line with the BoE’s own “guidance”.
The market reaction has been fairly limited. The GBP has strengthened a bit against the EUR and the USD, while Gilts have sold off. Today, markets are probably focussing on the scrapping of threshold-based forward guidance, which could be seen as a fairly hawkish signal. In the coming weeks, several MPC members are likely to be repeating the fairly dovish tone from Mr Carney today.
Nordea