Aug. 24 (Bloomberg) -- Bank of England Deputy Governor Charlie Bean said a tightening in U.K. gilt yields should be restrained by its pledge not to consider raising interest rates before unemployment falls to 7 percent.
“Short-term yields have moved up since our announcement on a string of good news about the economy, but the unemployment threshold, by serving as a reminder of just how much growth is needed to regain lost ground, should temper the extent of any tightening,” Bean said today at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming.
The U.K. central bank this month embraced so-called forward guidance by projecting it will keep its benchmark rate at 0.5 percent until late 2016 as it waits for the jobless rate to fall from 7.8 percent. That hasn’t stopped investors from pushing up U.K. gilt yields as a strengthening economy raises questions over whether the central bank will hold out so long.
“The knowledge that monetary policy will not be tightened until the U.K.’s fledgling recovery is secured should boost confidence,” Bean said. “Moreover, it should reduce the likelihood that the present expansionary monetary stance is withdrawn prematurely through an upward movement in market interest rates.”
Bean said such forward guidance and good communications alone won’t be enough to guarantee the exit from easy monetary policy will be smooth. That’s because even when a central bank’s intent is well understood, market rates respond to economic data rather than wait for policy makers to act.
“Although there are benefits to the market more accurately anticipating a given policy decision, because the data are likely to evolve in an imperfectly predictable fashion, so will market interest rates and asset prices,” Bean said.
The 10-year gilt yield was little changed to end the week at 2.71 percent. The price of the 1.75 percent security due in September 2022 was 92.375. The rate climbed to 2.76 percent on Aug. 22, the highest since Aug. 8, 2011.
U.K. government bonds lost 4 percent in the past three months through Aug. 22. They underperformed Treasuries’ 3.4 percent decline and German securities, which slid 2.3 percent, according to Bloomberg World Bond Indexes.
Bean pushed back against suggestions that policy makers need to be more coordinated globally to reduce international fallout from their decisions, saying acting in concert was not a “viable option.”
“The best we can probably aspire to is directing monetary policies to achieving domestic price stability in a sensible manner and seeking to communicate our policy intentions as clearly as possible,” he said.
--Editors: James Tyson, Christopher Wellisz