Forex Flash: Carney´s Coming - Nomura

FXstreet.com (Barcelona) - Nomura economists Philip Rush and Charles St-Arnaud believe that the BoE under Mark Carney is likely to move more firmly in favour of credit easing and forward policy guidance over QE.

They feel that macroprudential measures can then be used to contain any froth. Further, they add that without any relaxation of capital requirements, they expect the stimulative effect of other tools to remain neutered. Continuing, they note that Carney‟s Canadian experience may influence his approach in the UK, where weak growth in absolute and relative terms has allowed looser policy. Dovish policy follows optimism about productivity, which Mr Carney shares. Therefore, they still expect inflationary pressures to be left unchecked because of what they consider a mistaken belief that inflation is too subdued, at least in the medium term.

Further, they note that there e is growing disillusionment with QE as the tool to use though, and this leans in favour of Mr Carney‟s preference for more targeted tools. They write, “Expanding the Funding for Lending Scheme is a likely first step but any credit easing is still likely to fall short of buying private assets outright (and) cutting the bank rate is no less counterproductive than before.” They see that stimulus can come from communication as well as action, and they expect Carney to explore this frontier. The BoC pioneered forward guidance, albeit without publishing a path for policy and they expect him to introduce conditional guidance at the BoE.

Nevertheless, they feel that targeting nominal GDP remains a bad idea, and has been put to bed as an idea. They add, “Loose policy, or guidance thereof, can create problematic frothy lending, which has already occurred in Canada without a monetary response because Mr Carney prefers to use macroprudential policies instead.” Mr Carney looks set to be an avid user of macroprudential policies but sustaining pro-cyclical capital requirements could keep offsetting all other stimulus measures, thus delaying the return of growth and curbing the pace of recovery.