BOE’s Carney seen raising rates before Yellen and Draghi

Bank of England Gov. Mark Carney. (Bloomberg)

Investors are betting Bank of England Gov. Mark Carney will lead the charge out of record-low interest rates as central banks pivot from fighting stagnation to managing expansions.

Economists at Citigroup Inc. and Nomura International Plc say the strongest growth since 2007 will prompt the U.K. to lift its benchmark from 0.5 percent as soon as this year. Money-market futures show an increase in early 2015. That’s at least three months before the contracts indicate Federal Reserve Chairman Janet Yellen will raise the target for the federal funds rate. European Central Bank President Mario Draghi and Bank of Japan Gov. Haruhiko Kuroda are forecast to maintain or even ease monetary policy.

“Carney and BOE officials will be looking at the domestic recovery, and if that is strong enough, then they will feel comfortable increasing rates before the Fed,” said Jonathan Ashworth, an economist at Morgan Stanley in London and former U.K. Treasury official. “Tightening by the major developed central banks will be gradual, and they will be aware of what everyone else is doing.”

The BOE will lift rates in the second quarter of 2015 and the Fed will increase in 2016, Morgan Stanley predicts.

This wouldn’t be the first time Carney, 48, has broken from the pack. As governor of the Bank of Canada, he abandoned a “conditional commitment” to keep rates unchanged until July 2010, citing faster-than-expected growth and inflation. He delivered a rate increase in June of that year, putting him ahead of other Group of Seven central bankers.

The risk of being first this time is that the divergence pushes up the U.K.’s currency and bond yields, threatening to choke off its economic upswing.

Acting before the Fed ― now led by Yellen, who was sworn in Monday as chairman ― “would require a very big stomach for having sterling rise,” former BOE policy maker Adam Posen said in a Jan. 8 interview.

While all economists surveyed by Bloomberg News predict BOE policy makers will leave their official bank rate unchanged when they meet Feb. 6, Carney may seek to quell expectations for increases when he releases new economic predictions Feb. 12.

Investors pushed up Britain’s borrowing costs as consumer spending powered the economy back from recession. The pound has already climbed to the highest level in more than 2 1/2 years against the dollar, and the extra yield investors demand to hold 10-year U.K. government bonds over similar maturity German bunds widened to 1.13 percentage points last month, the most since 2005 based on closing prices. Both may undermine growth. (Bloomberg)