7 Aug 2013
Flash: Carney-Vol Arrives With Forward Guidance - TD Securities
FXstreet.com (London) - Richard Kelly, Head of European Rates and FX Research at TD Securities notes how the volatility has arrived with Forward Guidance.
Key Quotes:
"Bank of England announces forward guidance with a threshold of 7% in the unemployment rate, currently 7.8%, and suggests this is unlikely until the second half of 2016".
"This is conditional on financial stability, anchored inflation expectations, and the BoE’s inflation forecast 18-24 months ahead being no higher than 2.5%".
"The latter effectively just makes implicit the tolerance the BoE has had for some time and the same tolerance the FOMC has communicated, but because of the BoE’s poor track record on meeting their inflation target, their credibility here is seen as weak by the market".
"The BoE sees inflation stabilizing at 2% with no upward drift higher through mid-2016 even iff the market priced no rate hikes through early 2016. So any pricing by the market of rate hikes before this will be seen as downside risks to the economy by the MPC".
"We ultimately think the BoE will hike rates in 2015, not 2016, but this is not the message they are likely to communicate or contemplate until spring next year at the earliest. So for now, we are likely to see several months at least of “Carney-vol”—choppy trading in large ranges as the MPC’s message will repeatedly have to push back on market pricing".
Key Quotes:
"Bank of England announces forward guidance with a threshold of 7% in the unemployment rate, currently 7.8%, and suggests this is unlikely until the second half of 2016".
"This is conditional on financial stability, anchored inflation expectations, and the BoE’s inflation forecast 18-24 months ahead being no higher than 2.5%".
"The latter effectively just makes implicit the tolerance the BoE has had for some time and the same tolerance the FOMC has communicated, but because of the BoE’s poor track record on meeting their inflation target, their credibility here is seen as weak by the market".
"The BoE sees inflation stabilizing at 2% with no upward drift higher through mid-2016 even iff the market priced no rate hikes through early 2016. So any pricing by the market of rate hikes before this will be seen as downside risks to the economy by the MPC".
"We ultimately think the BoE will hike rates in 2015, not 2016, but this is not the message they are likely to communicate or contemplate until spring next year at the earliest. So for now, we are likely to see several months at least of “Carney-vol”—choppy trading in large ranges as the MPC’s message will repeatedly have to push back on market pricing".