The BoE orders a 7 and 7

By Ben Walsh
August 28, 2013

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

Bank of England governor Mark Carney has delivered “a radical change of monetary policy in the world’s sixth largest economy”, says the FT’s John Aglionby. For the first time, the BoE will tie its monetary policy to the unemployment rate.

Unemployment, currently at 7.8%, will have to fall below 7% for the bank to even begin thinking about raising interest rates, Carney said: “When unemployment reaches 7% the MPC [Monetary Policy Committee] will reassess the state of the economy and the appropriate stance of monetary policy”. In addition, Carney set a goal of bank capital ratios reaching at least 7% by the end of 2013; Barclays, Lloyds, and RBS are in total $41 billion short of that mark.

Carney’s aim, he said, is to push Britain past barely avoiding a triple-dip recession, and toward a “period of sustained and robust growth”.

Ben Southwood of the Adam Smith Institute thinks Carney is moving in the right direction, but hasn’t gone far enough:

What we really need is a truly rule-based system that takes discretion away from nine ‘wise men’ and uses market forecasts to create real stability. That system is nominal income targeting.

The FT’s Claire Jones reports that “forward guidance has so far met with scepticism from financial markets, which still think the BoE’s first rate rise will come in the second half of 2015”. The BoE projects there is a 1 in 3 chance that unemployment will hit 7% by mid-2015, and a 1 in 2 chance that it will reach that level by mid-2016. Better-than-expected July unemployment claims sent yields higher earlier this month.

The Guardian’s Larry Elliott puts the speech in oppositional terms:

The City has looked at the state of the UK economy and seen a different tale from the one Carney has been spinning. Financial markets believe that growth will be stronger than the Bank expects, with the result that the jobless total will fall more rapidly… The City, Carney suggested, had got it wrong.

10-year UK government bond yields are up around 20 basis points today, perhaps because, as Kit Juckes of Societe Generale told the WSJ, “Carney’s speech is a bit more neutral than the market expected”. Additionally, a regulatory change will allow UK banks to cut their holdings of liquid assets, such as government bonds. – Ben Walsh

On to today’s links:

Charts
Visualizing hospital pricing across the country – Beehive Media

UGH
“We can’t even properly manage ourselves” – The Fed still thinks it’s terrible at teamwork – Shahien Nasiripour

Legalese
The six largest banks have spent $103 billion on legal fees since the crisis – Bloomberg

Right On
“The financial media is not a toy to be used and discarded as you please” – Josh Brown

Awesome
Mainstreaming Interethnic Inclusiveness: “I have a dream” in powerpoint format – Aid Watchers

New Normal
Where middle class wage jobs are disappearing the fastest – WaPo
Leonhardt on the still depressing labor force participation rate – NYT

Long Reads
Etsy’s existential crisis – Daily Dot

Disruptions
The internet is putting brothels out of business – Bloomberg

Oxpeckers
“Kurtz is elevating the editorial standards of Fox News” – Erik Wemple

Alpha
Hedge fund managers are all a little nuts, by the way – WSJ

Possibly Useless Data
For the first time, the combined GDP of poor nations is greater than the rich ones – Quartz

Definitely Useless Data
“Lasik tells you almost nothing about the rest of the health care system” – New Republic

Yikes
Merrill Lynch agrees to settle racial bias lawsuit for a record $160 million – DealBook

Follow Counterparties on Twitter. And, of course, there are many more links at Counterparties.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/