But the Market has Other Views

9th September 2013

The market is unconvinced by Mr Carney’s 2016 target. One of the reasons why ‘forward guidance’ is a relatively new idea is that central bankers are a cautious bunch who avoid making themselves a hostage to fortune. Mr Carney’s three ‘knockouts” give him some wriggle room, but the more flexibility there is, the less the credibility of the forward guidance.

Since the guidance was issued, interest rates have generally been rising. For example, on the day of the announcement (1 August), five year government bonds (gilts) were yielding 1.42% according to the Bank of England, whereas by the end of the month their yield was 1.71%, having fallen back from 1.8%+ on Syrian concerns.

There are a variety of reasons why Mr Carney and Mr Market are at odds with each other. One is that inflation ‘knockout’: CPI inflation is currently (July 2013) running at 2.8% and has been at or above 2.5% for all but three months since January 2010.

Another is the 7% unemployment target, which some economists think could arrive well before mid-2016. However, the biggest obstacle to 2016 is probably another central banker; Ben Bernanke, chairman of the US Federal Reserve. Bernanke has said US short term rates will stay on hold until unemployment hits 6.5%, but he has also indicated that the central bank will start to cut back on its $85bn a month quantitative easing (QE) programme soon.

That has given US investment markets the jitters, pushing up US government bond yields and bringing volatility back to US share prices. Other global markets have caught Wall Street’s chill as non-US investors wonder whether rising US Treasury rates mean their countries’ rates will have to increase as well.

From a UK perspective the rises so far have had one benefit: annuity rates and income withdrawal rates have been nudged up. September’s income withdrawal interest rate of 3% is the highest since November 2011.
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