Yellen and Carney face test over interest rates

While the BOE governor is expected to explain his quarterly forecasts, the Fed chief may detail reasons for keeping monetary policies steady

PUBLISHED : Monday, 10 February, 2014, 4:31am
UPDATED : Monday, 10 February, 2014, 4:31am

When Bank of England governor Mark Carney presents his quarterly economic forecasts this week, he faces a challenge similar to that faced by his colleagues at the United States Federal Reserve: how to convey the likely path of policy as stronger-than-expected growth moves up the likely date for reaching thresholds for considering an interest rate increase.

In the US that test falls to Janet Yellen, when she delivers her first Fed semi-annual monetary policy report to lawmakers. The first female chairman of the central bank testifies on the economy days after figures showed the weakest two months of job growth in three years.

Retail sales will showcase the week's US economic data. Economists project purchases were little changed last month as harsh, winter weather blanketed much of the US and kept consumers from venturing out to car dealerships and malls.

More signs of slower growth may emerge in China this week, with reports forecast to show slower export growth and a narrowing of the trade surplus last month.

Carney will present quarterly forecasts on unemployment, growth and inflation in London on Wednesday. Policymakers are assessing the second phase of forward guidance, now that stronger-than-expected growth has moved up the likely date for reaching their threshold for considering an interest rate increase.

The unemployment rate has fallen much faster than the Bank of England forecast in November last year, and now stands at 7.1 per cent, just above the 7 per cent threshold for considering raising the key interest rate from its record-low 0.5 per cent. The bank's projections showed unemployment staying above the threshold at least until 2015.

Carney has said he sees no "immediate" need for a rate increase, and is likely to explain either how the guidance framework will be changed, or why it should remain.

"Measures of underemployment, and a possible reduction to the medium-term unemployment rate estimate, are expected to feature prominently in the next phase of forward guidance - some of these measures still indicate plenty of slack," Sam Hill, an economist at RBC Capital Markets in London, said in a research note.

Tomorrow, Yellen, in her first public speaking event since taking the Fed chair on February 3, may add details about the Fed's intent to keep the benchmark lending rate near zero "well past the time" the unemployment rate declines below 6.5 per cent, as it said in its January statement.

A labour report on Friday clouded the outlook for the economy and Fed policymakers. A 113,000 increase in hiring last month fell short of analysts' expectations of a 180,000 advance. At the same time, the unemployment rate fell to 6.6 per cent, the lowest since October 2008.

After quickening in the last half of last year, the US economy has shown signs of cooling. Retail sales last month were probably little changed as colder-than-normal temperatures and snowfall led to fewer car purchases and trips to shopping centres. The figures will be out on Wednesday.

"The biggest challenge is that Yellen will have to decide when and how fast to return interest rates to a more normal level of 4 per cent," Paul Ashworth and Paul Dales, economists at Capital Economics, said in a research report. "The focus of this week will be Yellen's testimonies, but the economic data releases may strike a soft tone. Falls in [car and petrol] sales probably dragged down retail sales in January, while unusually bad weather probably restrained industrial production in the same month."