Thursday, July 4, 2013

BOE & ECB Provide Forward Rate Guidance to Offset Fed’s Tapering Talk
Both the BOE and the ECB did something new today. They provided forward guidance on their policy for their key interest rates. Both implied that the recent jump in bond yields triggered by the Fed’s intention to taper QE may require them to keep their key rates at their current 0.5% and maybe lower them.

Just four days after Canadian Mark Carney became the new governor of the BOE, he seems to have convinced his colleagues on the Monetary Policy Committee to issue a statement showing it is in no rush to raise rates. Here is the relevant comment from the statement on this subject from the BOE today:
At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.
Additionally, the first question asked by a reporter at today’s ECB press conference with Mario Draghi was why the ECB wasn’t also providing forward guidance. The ECB president scolded the reporter, saying that the reporter obviously hadn’t been listening to his prepared remarks:
Yes, that is why I said you haven’t listened carefully. The Governing Council has taken the unprecedented step of giving forward guidance in a rather more specific way than it ever has done in the past. In my statement, I said “The Governing Council expects the key…” – i.e. all interest rates – “…ECB interest rates to remain at present or lower levels for an extended period of time.” It is the first time that the Governing Council has said something like this. And, by the way, what Mark Carney said in London is just a coincidence.
He responded to another question on this subject by specifying the variables that will influence the ECB’s rate-setting decisions in the future:
Together with the sense of the length of time, you also have to look at three sets of economic variables, namely the medium-term outlook for inflation, the economy and monetary dynamics. Monetary dynamics means monetary aggregates and credit flows. What the Governing Council did today was to inject a downward bias in interest rates for the foreseeable future linked to its assessment of these three sets of variables. The decision was unanimous, which is also quite important.

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