25 Nov 2013
Flash: Thoughts on post-guidance guidance in the UK – Merrill Lynch
FXstreet.com (London) - John Wraith, strategist at Bank of America Merrill Lynch suggested, the MPC's current forward guidance will be strictly adhered to as the Committee focuses on convincing borrowers & investors.
“In due course, however, attention will turn to how best to manage the eventual normalization of market and policy rates”.
“History shows the market's tendency to anticipate a full hiking cycle. The MPC must communicate clearly to protect recovery”.
"Since introducing the UK's forward guidance framework in August, which states that the MPC will keep the Bank Rate at 0.50% at least until the LFS unemployment rate falls to 7.0%, as long as none of the three knockouts (relating to MPC inflation expectations, external inflation expectations, and financial stability risks) are triggered, Governor Mark Carney and his colleagues have conducted an intensive communication offensive. Their aim: to try and control market expectations of how long the Bank Rate will remain at its all-time low level”.
“With UK economic data and sentiment indices continuing to improve dramatically since guidance was introduced, this strategy has been a challenging one”.
“But we tend to share Deputy Governor Charlie Bean's recent assertion that considering how little tightening is priced in compared to the historical correlation between 2y swap rates relative to the overnight rate, and the level of UK PMIs, guidance has had a stronger impact than some give it credit for”.
“In due course, however, attention will turn to how best to manage the eventual normalization of market and policy rates”.
“History shows the market's tendency to anticipate a full hiking cycle. The MPC must communicate clearly to protect recovery”.
"Since introducing the UK's forward guidance framework in August, which states that the MPC will keep the Bank Rate at 0.50% at least until the LFS unemployment rate falls to 7.0%, as long as none of the three knockouts (relating to MPC inflation expectations, external inflation expectations, and financial stability risks) are triggered, Governor Mark Carney and his colleagues have conducted an intensive communication offensive. Their aim: to try and control market expectations of how long the Bank Rate will remain at its all-time low level”.
“With UK economic data and sentiment indices continuing to improve dramatically since guidance was introduced, this strategy has been a challenging one”.
“But we tend to share Deputy Governor Charlie Bean's recent assertion that considering how little tightening is priced in compared to the historical correlation between 2y swap rates relative to the overnight rate, and the level of UK PMIs, guidance has had a stronger impact than some give it credit for”.