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UK - Carney Issues Forward Guidance

We’ve been fundamental bulls on the UK economy since releasing our June 11th European update presentation titled “Where Does Europe Go From Here”. Today’s announcement from Mark Carney, the new governor of the BOE, underlines our view that Carney will be an important catalyst (clear and transparent) to guide monetary policy (and expectations around it), which he did today in providing for the first time a framework of forward guidance on monetary policy linked to unemployment.

Carney said that the BOE will not raise interest rates or revise its asset purchase target until the unemployment rate falls to 7%. Further, he noted that 7% should be viewed as a “way-station” for the MPC to reconsider its policy stance, and not an outright target for the unemployment rate.  The BOE said that it sees the unemployment rate greater than 7.0% until at least Q3 2016 (it’s currently at 7.9%).  

Despite a tone from Carney of cautious optimism around existing spare capacity in the economy, and growth only beginning to reach historical averages, we remain bullish on UK fundamentals. Having been the first country to issue austerity to improve its fiscal balances, the economy is seeing positive inflections and momentum in the form of improvement in consumer sentiment, PMI readings, retail sales, industrial production, and housing, while the gap between wages and CPI tightens. Reductions in the savings rate may also be an indicator of improved sentiment. (The charts below show updates to these indicators).

Should the UK meet or exceed its outlook (below) to reduce inflation and accelerate growth over the next three years, we’ll remain bullish on the country’s investment prospects. Our quantitative levels suggest a healthy level of intermediate term TREND support at 6,412 on the FTSE.

UK - Carney Issues Forward Guidance - zz. levels

Bank of England Outlook:


GDP growth is stronger than in the last forecast (May).


2013 of +1.5% vs prior forecast +1.2%

2014 of +2.7% vs prior +1.9%

2015 of +2.4% vs prior +2.2%

CPI inflation is likely to remain close to 3% in the near term; by the second half of the three year forecast period the risks around the 2% inflation target are judged to be broadly balanced.

2013 +2.9%, unchanged vs prior forecast

2014 +2.4% vs prior +2.1%

2015 +2.0% vs prior +1.9%

UK - Carney Issues Forward Guidance - z. retail sales and industrial

UK - Carney Issues Forward Guidance - zz. cpi

UK - Carney Issues Forward Guidance - zz. savings rate

UK - Carney Issues Forward Guidance - zz. gdp

Matthew Hedrick

Senior Analyst