After years in post-crisis mode, the Fed's decision marks the
beginning of a return to normal monetary policy in the United
States. Crucially for Carney, it allows him to assess how the U.S.
economy and markets react to costlier borrowing before making what
will be a sensitive move of his own.
The British economy is likely to be among the world's
fastest-growing for a third year in a row next year and, just as in
the United States, it has seen a drop in unemployment.
But faced with near non-existent inflation, sluggish wage growth and
ultra-loose monetary policy in Britain's main euro zone trading
partners, Carney has already stressed he would not necessarily move
in step with his Fed counterpart Janet Yellen.
To be sure, he sent signals in July that a decision on whether to
raise rates for the first time since 2007 could become clearer
around the end of this year. And as late as October, some analysts
were betting on the Bank of England (BoE) following hard on the
heels of a U.S. move.
But British data has since weakened and inflation, at a mere 0.1
percent, is still well below the Bank's 2 percent target.
The next BoE announcement on rates - which have been at a record low
of 0.5 percent since 2009 - is due on Jan. 14.
"I think it will be difficult for the Bank of England to tighten
monetary policy ... until headline inflation reaches 1 percent
again," said David Page at AXA Investment Managers.
REASONS TO BE CAUTIOUS
Aside from the inflation outlook, there are plenty of other reasons
Carney might be cautious - not least Britain's in-out referendum on
its EU membership due by the end of 2017, and finance minister
George Osborne's plans for further spending cuts as part of his
mission to run a budget surplus.
Both of these have the potential to affect economic growth, and
influence the BoE's assessment.
Carney has hinted on a couple of occasions in the past two years
that the turning point might be nearing on rates. But as his
predecessor Mervyn King - who was criticized for responding too
slowly to the 2007-9 crisis - found out, the exact timing of any
move is a delicate balancing act.
Carney's previous hints of a British rate rise have been knocked off
course by the twists and turns of the world economy, including the
plunge in global oil prices which at one point sent British
inflation tumbling to below zero.
With financial markets pricing in a rate hike in late 2016 to early
2017, but most economists in Reuters poll pointing to an earlier
move in the second quarter next year, Carney's challenge now is to
make sure he gets his messaging right in the months ahead. [ECILT/GB]
"The Bank of England has continually changed the goal-posts for us,
as investors, to try and decide how monetary policy is being decided
and what the ultimate point of lift-off for the UK will be," Scott
Thiel, global head of bonds, at BlackRock, the world's largest asset
manager, said before the Fed decision.
[to top of second column]
Fed chief Yellen spent months flagging that the U.S. rate hike was
on its way before Wednesday's move.
By contrast, officials at the British central bank have in recent
months limited themselves to saying they are watching and waiting to
see how the country's economy performs in the coming months,
distancing themselves from clearer signals they sent previously that
a rate hike might be coming.
STUCK IN THE MIDDLE
Another key consideration for the BoE is the impact a rate rise
would have on sterling, which before the Fed decision was up 4
percent against a basket of currencies and up 6.6 percent against
the euro so far this year.
Giving British exporters some respite, sterling has fallen around
0.6 percent against the dollar since Dec. 1 as expectations for a
U.S. rate hike mounted.
But if the BoE changes its tone and signals it might follow the Fed
soon, that could push sterling up further against the euro just as
the European Central Bank moves in the opposite direction to provide
more stimulus to the single currency area.
That would hurt those exporters and further frustrate hopes of the
economy becoming less reliant on domestic demand. A stronger pound
would also hold back an expected rise in inflation closer to the
Mike Amey, head of the UK portfolio of fund management firm Pimco,
said Carney's dilemma was to "sit in the middle" of two contrasting
forces when deciding on interest rates: a Fed rate hike on the one
hand and an accommodative ECB on the other.
"The message from the Bank of England at the moment is we are happy
to wait and see how the U.S. economy responds to the beginning of
the U.S. interest rate cycle, and we have a very low inflation rate,
so we feel we have got time to wait."
(Additional reporting by William Schomberg and Dhara Ranasinghe;
Graphics by Andy Bruce; Editing by Mark John and Pravin Char)
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