The minutes of his first Bank of England MPC meeting reveal that the urbane Governor Carney in fact had quite a baptism of fire, having to preside over a meeting riven by dissent, which was very significant, tending to suggest that the MPC's commitment to keep rates "low, for longer", is weaker than first thought.
First of all, there was a bombshell line in the minutes, revealing some sympathy with market rate hike expectations. Governor Carney had previously tried to persuade the market to flatten the yield curve, labelling the market’s expectations for the quantum and timing for rate rises as "unwarranted", but we now discover that this view was by no means unanimous on the committee:
"Other (MPC) members did not think market interest rates were obviously out of line with their view of the outlook."
Yet more dissent came from MPC member Weale, who objected to the 18 to 24 months horizon embodied in one of the "knockouts" that would cause the Bank to raise rates before unemployment reaches the 7 per cent threshold. He felt that the 18 to 24 months horizon was too long, i.e. the Bank will be prepared to ignore a blip in inflation if it thinks it’ll be back below 2.5 per cent within two years, (oh yes, the Bank’s inflation target has effectively now surreptitiously risen to 2.5 per cent, rather than 2 per cent). "One member, while accepting the principles of forward guidance, saw a particularly compelling need to do more to manage the risk that forward guidance could lead to an increase in medium-term inflation expectations, by setting an even shorter time horizon; that would make clear that the forward guidance was fully compatible with the Committee’s commitment to meeting the 2 per cent inflation target in the medium term."
Evidence seems to be mounting that global economic activity seems finally to be accelerating-maybe even creating a more classically rapid recovery, as opposed to the rather anaemic variety we have so far enjoyed.
UK economic data is already on a roll, with significant recent positive surprises from employment and weekly earnings, Purchasing Managers’ Indices, (Manufacturing, Construction and Services), Industrial Production, the Trade Balance, and of course, Housing Indicators. As for the US, the July unemployment report may have been a tad disappointing, but forward-looking indicators such as the ISM surveys, (both Manufacturing and Non-manufacturing), have recently exceeded expectations, retail sales look healthy, and the latest jobless claims figures were very good news.
Even the poor old Eurozone has managed to crawl out of recession, and China has become more supportive of growth. For example, China Daily yesterday noted that Beijing authorities are aiming to boost the consumption of information products and services. China’s consumption of information products and services is expected to grow at an annual pace of at least 20 per cent to reach CNY3.2 trn ($518 bn) by the end of 2015, according to a guideline released by the State Council yesterday. In another positive sign, China’s industrial power usage rose to a one-year high in July.
All of this means that bond markets are set to remain on the ropes, testing and pushing through recent highs in yields, returning to the sort of standard risk premia that normally determine the levels of long-term rates, as opposed to the search for safe-havens which has driven markets since the crisis broke.