It’s all about forward guidance, ladies and gents! In their recent speeches, BOE and ECB officials didn’t hesitate to share their thoughts on the economy and monetary policy possibilities. Here are the main takeaways.
Bank of England (BOE)
1. Based on the tone of their testimonies, BOE Governor Carney and his men have made it pretty clear that they are unfazed about rate hike expectations.
You see, market participants have been speculating that the U.K. central bank might consider increasing rates earlier than stated, as the economy has shown considerable improvements recently.
Carney clarified that as long as rate hike speculations don’t result to upward pressure on mortgage rates or business loan rates, the BOE is likely to keep monetary policy unchanged. “The goal of forward guidance is to reassure households and businesses that borrowing costs won’t rise until the economy is on a much firmer footing, and to get them spending,” he reiterated.
2. As for the 7% unemployment rate target, Carney pointed out that the U.K. jobs situation is just one part of the equation.
He reminded market watchers that policymakers are also watching inflation very closely and that the annual CPI, which stood at 2.8% in July, is still way above the BOE’s 2% target. After all, price stability is the core mandate of the bank, as MPC member David Miles mentioned.
European Central Bank (ECB)
1. Like the BOE, the ECB is still committed to keep its rates low for an extended period of time…
In a speech in Riga, Latvia, Mario Draghi repeated last week’s statement that the “shoots are very, very green” in terms of the euro zone’s growth. Heck, he isn’t even paying much attention to the PMIs and investor and consumer confidence, saying that they’re mostly survey data and not hard data.
2. …but the ECB also thinks that the current money market movements are “unwarranted.”
If you remember, Draghi crushed the euro last week not only because he remained cautious about the economy, but he also hinted that the central bank would intervene if they think that money market movements are “unwarranted.”
Well, that’s exactly what Draghi is saying now! Right after he said that short-term money market rates have been and are unwarranted, he threatened that the ECB “isn’t running out of options at all.” Yikes! Does this mean that we’ll see an ECB intervention sooner rather than later?
Judging by the resolve in the BOE and ECB’s speeches, we can see that both are struggling not to be overly optimistic over their economic growth. Not only that, but they’re also sticking to their guns despite what the markets are pricing in. The question is, how far are they willing to go to prove their points and how long will their resolve last?