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    What did Mark Carney mean?

    Last week, the Bank of England Governor Mark Carney said: ‘In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year’ . The expert community immediately began discussing possible message of this statement. Some even suggested that the British central bank might raise rates by the end of this year …

    In believe such an interpretation of Mark Carney’s words is completely wrong. I think he was talking about something else – that by the end of this year, the Bank of England would be able to give the markets a temporary benchmark, approximate period when to expect the beginning of policy tightening cycle. It will be something similar to what the US Federal Reserve is doing by expressing its readiness for the first rate hike in 2015.

    Speculation that Mark Carney and his colleagues are almost ready to take the path to the normalization of monetary policy seems a little strange, especially in light of the recent British macroeconomic statistics. This statistics is not that brilliant so that the Bank of England would suddenly move the first rate hike from 2016 (which it mentioned earlier) to 2015. Generally, the reports published in the last month, have poured a more realistic light on the state of the UK economy.

    At the beginning of the year the situation looked rather strange: on the one hand, we regularly received strong signals from the British labor market and business activity indices, on the other – the GDP growth report in the first quarter revealed a significant slowdown in economic growth – to 0.3% q/q and 2.4% y/y.

    However reports from the last month provided more clarity. Firstly, after the revision the UK economic growth in the first quarter appeared to be higher than previously reported, amounting to 0.4% q/q and 2.9% y/y. Secondly, it became clear that the recovery of British labor market in the second quarter came to a halt. The International Labour Organization, registered growth of unemployment in May for the first time since 2013 (from 5.5% to 5.6%), and the Office for National Statistics reported the increase in jobless claims in June for the first time since 2012. It’s worth noting, by the way, that decline in jobless claims has been gradually slowing down for four consecutive months, from February to May, and in June this trend ended up with growth (see the Chart).

    united-kingdom-claimant-count-change21-7-15

    Thus, the picture has become more realistic: the British economy is not experiencing a sharp slowdown, neither it shows any signs of rapid recovery in the labor market. Overall, the UK economy looks pretty strong, but it is quite possible that employment growth in the UK in the coming months will be restrained.

    It’s hard to believe that weak labor market report could force the Bank of England to move its first rate hike several months ahead? And this is exactly what some market participants expect – those who are waiting for the beginning of tightening cycle in the fourth quarter. On the contrary, in this situation it would be logical for the Bank of England to observe the development in the second half of the year. Actually, this, in my opinion, is what Mark Carney meant: the central bank will watch the economy for several months and by the end of the year, based on these observations, will provide market with its plans for the future.

     

    Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!

    Last week, the Bank of England Governor Mark Carney said: ‘In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year’ . The expert community immediately began discussing possible message of this statement. Some even suggested that the British central bank might raise rates by the end of this year …

    In believe such an interpretation of Mark Carney’s words is completely wrong. I think he was talking about something else – that by the end of this year, the Bank of England would be able to give the markets a temporary benchmark, approximate period when to expect the beginning of policy tightening cycle. It will be something similar to what the US Federal Reserve is doing by expressing its readiness for the first rate hike in 2015.

    Speculation that Mark Carney and his colleagues are almost ready to take the path to the normalization of monetary policy seems a little strange, especially in light of the recent British macroeconomic statistics. This statistics is not that brilliant so that the Bank of England would suddenly move the first rate hike from 2016 (which it mentioned earlier) to 2015. Generally, the reports published in the last month, have poured a more realistic light on the state of the UK economy.

    At the beginning of the year the situation looked rather strange: on the one hand, we regularly received strong signals from the British labor market and business activity indices, on the other – the GDP growth report in the first quarter revealed a significant slowdown in economic growth – to 0.3% q/q and 2.4% y/y.

    However reports from the last month provided more clarity. Firstly, after the revision the UK economic growth in the first quarter appeared to be higher than previously reported, amounting to 0.4% q/q and 2.9% y/y. Secondly, it became clear that the recovery of British labor market in the second quarter came to a halt. The International Labour Organization, registered growth of unemployment in May for the first time since 2013 (from 5.5% to 5.6%), and the Office for National Statistics reported the increase in jobless claims in June for the first time since 2012. It’s worth noting, by the way, that decline in jobless claims has been gradually slowing down for four consecutive months, from February to May, and in June this trend ended up with growth (see the Chart).

    united-kingdom-claimant-count-change21-7-15

    Thus, the picture has become more realistic: the British economy is not experiencing a sharp slowdown, neither it shows any signs of rapid recovery in the labor market. Overall, the UK economy looks pretty strong, but it is quite possible that employment growth in the UK in the coming months will be restrained.

    It’s hard to believe that weak labor market report could force the Bank of England to move its first rate hike several months ahead? And this is exactly what some market participants expect – those who are waiting for the beginning of tightening cycle in the fourth quarter. On the contrary, in this situation it would be logical for the Bank of England to observe the development in the second half of the year. Actually, this, in my opinion, is what Mark Carney meant: the central bank will watch the economy for several months and by the end of the year, based on these observations, will provide market with its plans for the future.

     

    Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!


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