BRUSSELS (Reuters) - Bank of England Deputy Governor Jon Cunliffe on Thursday described market moves signalling an interest rate hike only by the end of the decade as unwarranted, a clear sign of the central bank’s unease with market expectations.
Worries about the health of the global economy and banks have sent investors fleeing into safe assets over the past month, prompting markets to reverse expectations that the BoE could raise interest rates any time soon.
Monetary Policy Committee member Cunliffe said market pricing of the BoE’s first rate hike had been pushed out by two years compared with only a month ago, into the second quarter of 2019.
There is also a chance the BoE could even cut interest rates from their present record low of 0.5 percent, according to market pricing, despite BoE Governor Mark Carney saying all MPC members believe the next move will be a hike.
“I can’t see anything in the economic news that would lead to a shift like that,” Cunliffe said at an event in Brussels held by the Swiss Finance Council.
BoE officials rarely comment on market expectations of interest rates, although there have been notable exceptions, such as Carney’s 2014 Mansion House speech when he said a rate hike could come “sooner than markets expect”.
Cunliffe added it was unclear why there was such a disconnect between the economic data and the yield curve, but that it could reflect markets viewing low growth and entrenched low inflation as a “new normal”.
“(But) my big picture of the world hasn’t changed with the market yield curve,” Cunliffe said, referring to a “slow recovery story”.
Expectations that an economic downturn will keep interest rates lower for longer can prompt investors to scoop up higher-yielding long-dated debt, causing the yield curve to flatten or even invert.
He pointed to British jobs data on Wednesday that showed vacancies at record highs, the unemployment rate at its lowest level in a decade - although productivity has not recovered and pay is “still stuck and not recovered”.
“Putting these together I see this slow recovery story,” Cunliffe said.
If riskier assets started to rally and the MPC did not feel interest rate expectations were responding, more BoE policymakers might choose to hit out at market expectations, RBC economist Sam Hill said, adding that Cunliffe’s comments were “valid”.
“But at the moment I‘m not sure they’ve got the confidence to do this in an orchestrated way,” he said.
Economists polled by Reuters show a BoE rate hike coming by the end of this year.
Reporting by Huw Jones; Writing by Andy Bruce in London Editing by David Milliken and Alison Williams