8 Aug 2013
Flash: What to make of "Guidance from Carney"? –Societe Generale
FXstreet.com (Barcelona) - Kit Juckes, Global Head of Currency Strategy at Societe Generale notes the market conditions post Carney.
Key Quotes:
“The whole point of forward monetary policy guidance is to provide re-assurance that interest rates will follow a specific path, irrespective of what else happens in the economy”.
“The conditions attached to the guidance are there to maintain the central bank’s credibility by putting limits around the policy but they are not supposed to be met. It always seemed a tall order for Mark Carney and the MPC to craft forward guidance in a way which was both credible and unlikely to be knocked off course by the data”.
“What we have (a promise to keep rates here at least until unemployment falls to 7%, subject to inflation not being above 2½%) risks being undone by a combination of weak growth, falling unemployment and stubbornly high inflation. What then?”
“While rates will stay low for longer than most had expected, they may rise pretty sharply thereafter, and this is what markets are trying to price in. The speed with which a higher long-term rate path is being priced in, and the speed with which the pound has bounced, have both caught me by surprise, despite being moves I expected in due course”.
“Higher break-even inflation, divergence between UK and Euro forward rate curves, and further GBP/CHF gains are likely”.
Key Quotes:
“The whole point of forward monetary policy guidance is to provide re-assurance that interest rates will follow a specific path, irrespective of what else happens in the economy”.
“The conditions attached to the guidance are there to maintain the central bank’s credibility by putting limits around the policy but they are not supposed to be met. It always seemed a tall order for Mark Carney and the MPC to craft forward guidance in a way which was both credible and unlikely to be knocked off course by the data”.
“What we have (a promise to keep rates here at least until unemployment falls to 7%, subject to inflation not being above 2½%) risks being undone by a combination of weak growth, falling unemployment and stubbornly high inflation. What then?”
“While rates will stay low for longer than most had expected, they may rise pretty sharply thereafter, and this is what markets are trying to price in. The speed with which a higher long-term rate path is being priced in, and the speed with which the pound has bounced, have both caught me by surprise, despite being moves I expected in due course”.
“Higher break-even inflation, divergence between UK and Euro forward rate curves, and further GBP/CHF gains are likely”.