BoE's Carney set to hit back against skeptical markets
Bank of England (BoE) Governor Mark Carney will make his first public speech on Wednesday and analysts expect him to try and persuade businesses that interest rates will remain low for the foreseeable future in the face of growing skepticism over his policy of "forward guidance".
The Bank of England's "forward guidance" has sought to cap bond yields at the short-end. Instead, in recent weeks, gilt yields have climbed to multi-year highs and the pound has appreciated against the dollar as the U.K. economy has shown signs of improvement.
"Mark Carney will deliver his first public speech as BoE governor on Wednesday and is likely to emphasize the BoE's focus on maintaining accommodative monetary policy until unemployment falls below 7 percent. As such, we favor owning GBP/USD downside over this event," analysts at Barclays said in a research note on Monday.
(Read More: BoE split on forward guidance; unemployment steady)
Carney will speak at the East Midlands, Derbyshire and Nottinghamshire Chamber of Commerce and the East Midlands Institute of Directors on Wednesday at 1.45 p.m. with a press conference due shortly afterwards.
Carney announced on August 7 that the central bank will not raise interest rates until U.K. unemployment hits 7 percent. He also gave three other conditions or "knockouts" which would stop the BoE from changing rates: above-target inflation; unanchored medium-term inflation expectations and any threat to financial stability.
But markets have so far taken a dim view of the guidance. Interest rates on the 10-year benchmark government bond have climbed above 2.7 percent from 2.5 percent. Investors have turned more bullish on sterling, with the currency appreciating to 1.557 against the dollar from 1.534. The minutes of the MPC (Monetary Policy Committee) meeting added to Carney's woes, revealing that an external member - Martin Weale - dissented on the vote with fears that the Bank had gone soft on inflation.
"The introduction of formal forward guidance in the U.K. has been complicated by the amount of detail and caveats in the framework, and its potential impact largely overwhelmed thus far by ongoing data strength," John Wraith, a fixed income strategist at Bank of America Merrill Lynch said in a note on Friday.
(Read More: Fed vs BoE: Contrast in policy could hit pound)
Second quarter GDP (gross domestic product) for the U.K. was revised up to 0.7 percent on Friday, from an earlier figure of 0.6 percent. Kit Juckes, global head of foreign exchange strategy at Societe Generale said that data confirmed that the U.K. is in "mini-recovery" mode.
"It will continue to give the MPC and Mr Carney a headache in their desire to lock in low rates and provide insurance for the recovery. That is entirely of their own making. It's not the forward guidance that is misguided; it's the reference to unemployment and inflation."
The U.K. jobs market has remained strong even as the economic recovery has been sluggish, and this according to Juckes is making the BoE's job tougher.
(Read more: Carney unveils Fed-style forward guidance)
Kathleen Brooks, research director at FOREX.com, believes Carney will try to push yields lower in his speech on Wednesday.
"Although the BoE has adopted a version of Forward-Guidance lite, we still think there are a number of doves at the MPC who will be alarmed by the pace of gains in bond yields, and may be tempted to step out and criticize this move by the market, " she said in a research note.
Perhaps a clear sign of what to expect from Carney's speech came from his deputy on Friday. Charlie Bean told CNBC at the Jackson Hole symposium that the central bank is still quite a long way from starting to hike rates.
By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81