Dovish Carney stuns markets

EQUITY markets jumped yesterday after the Bank of England shocked investors by indicating that rates would stay at historic lows in the near future, despite recent signs that the British economy is starting to strengthen.

At new Bank governor Mark Carney’s first meeting, the monetary policy committee (MPC) took the unusual step of releasing a statement alongside its decision, even though it held rates at 0.5 per cent for the 52nd month in a row and kept its programme of asset purchases at £375bn.

“The implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy”, it said, giving a strong hint that monetary easing would continue for some time ahead.

Markets soared after the announcement was made, with the FTSE 100 closing up three per cent at 6,421.67, as sterling slumped against almost every currency in the world. The pound fell 1.35 per cent against the US dollar, and 0.65 per cent against the euro.

Carney made his first significant move at the Bank just days after replacing Lord King, who retired at the end of last week. In his previous role as governor of the Bank of Canada, Carney favoured a policy called forward guidance, which allows the Bank to indicate that interest rates will be held in place for an extended period of time. It has even been suggested that he could opt for a form of threshold targeting, like that used by the US Federal Reserve, which links interest rates to the rate of unemployment.

Analysts had always said an immediate change was unlikely as Carney settled into his new role, but the Bank’s statement has raised expectations that the coming months could yield more surprises, particularly after it drew attention to chancellor George Osborne’s request that it provide an assessment of the case for some form of forward guidance alongside its August’s inflation report.

Meanwhile in Brussels, Mario Draghi, the president of the European Central Bank (ECB) also broke from tradition by delivering forward guidance, promising to keep rates low for a prolonged period.

“The governing council expects the key ECB interest rates to remain at present or lower levels for an extended period, he said”.

The euro also fell against other world currencies.

“What was expected to be a rather dull meeting, turned out to be historical,” said ING’s Carsten Brzeski.

Ashraf Laidi at Citi Index, said Draghi had little choice left after the decision by the Federal Reserve to discuss tapering their QE scheme, and the ongoing crisis of government in Portugal.

Yet more proof that high tax rates are bad for the economy