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Did Carney Signal the End of BoE Stimulus? Markets Think So!

by on November 29, 2013 5:20 pm BST
 

The Bank of England (BoE) Governor Mark Carney may be looking to waning the United Kingdom off stimulus, and he aimed to stop the swell in the housing market just this week by diluting a credit-boosting program. Many housing sector analysts believe that the housing sector across the United Kingdom  is inflation with the London market being inflated the most.

Carney is also looking towards the recent gains in the gross-domestic product nudging up .8 percent, which is still weak but better. “It’s a sign the Bank of England has confidence in the economy,” mentioned Jeremy Hale, head of macro strategy at Citigroup Inc. The markets are beginning to price in higher rates going forward. However, bulls should not rejoice so soon. Governor Carney has said that positive data is not necessarily a trigger for higher rates. He acknowledges the recovery is still in a weak phase, and the BoE wants the target of unemployment to hit seven percent prior to discussing increases in rates.

Continued growth is still up-in-the-air and very much speculation. Goldman Sachs analyst Kevin Daly said that the growth in the United Kingdom was a surprise and revised his forecasts up to 2.7 percent GDP from 2.4 percent. Yet, former BoE policy market Adam Posen sees growth near current levels, 1.5-1.6 percent. At this point, it is still speculation as the economic data forecasts this year have been horrendously inaccurate. “It was only seven months ago when there were concerns about a triple-dip recession and people were talking about more stimulus,” said Nick Bate, an economist Bank of America-Merill Lynch.

The last time the BoE increased their benchmark rate was right before the global financial crisis in 2007, and now it is at an all-time low of .5 percent. And Carney has yet to say he will increase rates anytime soon. The core consumer-price index (CPI) data has continually gone down since June 2011, from 3.3 percent to the 1.7 percent print on November 2013. This would suggest more stimulus could be done.

It is still undetermined what Governor Carney will do other the long-run, but the markets think the recent positive moves in data is a reason to think rates will increase. However, Sterling and Gilt traders should take a look at the Federal Reserve who has stuck to their guns, in regards to targets. The US markets have tried to price in a taper every month since last July. The BoE is unlikely to change policy dramatically until unemployment drops to seven percent, while it still stands at 7.6 percent. Even so, it’s not a guaranteed trigger.

In an economy that is still recovering, the markets may be getting too far ahead of itself. The consequences in asset prices could be great.