Bank of England governor Mark Carney has said markets have misread his forward guidance and are wrong to price in an early base rate rise.
Speaking at a Treasury select committee yesterday, Carney denied that his forward guidance was "dead on arrival", after markets ignored his suggestion that rates won't rise until at least 2016.
Instead, markets quickly priced in the first base rate hike for mid-2015, with some analysts claiming it could come as early as next year.
But Carney denied the Bank's credibility had been damaged by the confusion, claiming business understands what he means, even if the City doesn't.
He also claimed that without his forward guidance, markets would have been anticipating an immediate rate increase, given that inflation and unemployment are falling, and the economy is growing.
And he repeated his position that the Bank wouldn't rush to raise interest rates even after unemployment has fallen below his trigger point of 7%.
As the economy recovers faster than expected, this target is likely to be achieved nine months earlier than Carney originally indicated.
Nida Ali at the EY ITEM Club dismissed Carney's argument that forward guidance is working because people aren't expecting an interest rate today.
"Given how far the level of GDP is below trend, it’s very unlikely that markets would be considering a rate rise now, despite the positive economic trends seen recently."
And she said that rates could still rise earlier than Carney is suggesting. "Financial markets are still likely to believe that unemployment touching 7% will lead to an increase in the interest rate."
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