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Economists expect dovish Carney in first key speech

Ahead of Bank of England governor Mark Carney’s first significant speech, economists have indicated he will be forced to defend the Bank’s promise to keep interest rates low until 2016.

Mr Carney will address the CBI East Midlands, Derbyshire and Nottinghamshire Chamber of Commerce and Institute of Directors at the East Midlands Conference Centre at 1.45pm on Wednesday afternoon, followed by a press conference.

Earlier this month, the Bank of England’s Monetary Policy Committee (MPC), which is chaired by the governor, announced a policy of forward guidance, which would keep interest rates at the historic low of 0.5 per cent until the unemployment rate falls to 7 per cent, which is not forecast until 2016.

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But the market has anticipated that interest rates could rise quicker than the bank expects, prompting long term gilt yields to rise.

Vicky Redwood, chief UK economist at Capital Economics expects the governor will take this speech as an opportunity to reassure markets that the Bank will continue to actively support the economy.

“Given the arguably disappointing market reaction to the Bank of England’s new forward guidance, we expect the tone to be quite dovish, with Mr Carney emphasising the MPC’s commitment to keeping interest rates low as the economy strengthens,” she said.

“He may even go so far as to hint that the MPC will do more to stem the rise in rate expectations if markets do not heed the guidance and at least say that the door remains open to more quantitative easing if necessary.”

But David Tinsley, UK economist at Capital Economics, said the most interesting aspect of the speech was likely to be the accompanying Q&A session, which was not a feature of previous governor Mervyn King’s appearances, and offers the chance to press Mr Carney further on the policy.

“This is almost like another press conference after the inflation report - he may answer questions about the rise in long term yields being unhelpful to the economy,” Mr Tinsley said.