New Bank of England Governor Mark Carney will probably be unable to rock the boat too much when he initially takes charge. Unlike Kuroda at the BoJ, who was picked by President Abe for his policy leanings, the UK Government is probably not as willing to undertake similar radical policy steps. But the former Bank of Canada governor is known for his preference for the use of forward guidance, which hasn't been a feature of BoE communication to date.
The chief challenge from a monetary policy perspective will be maintaining low yields on Gilts, which may be challenging with the US closer to recovery than the UK. As the chart left shows, UK 10-year bonds have largely tracked those of the US and for the most part of recent history have traded to a discount (or higher yield) to US treasuries.
Going forward, the BoE would probably like to see this switch to a premium (or lower yield), given the more difficult economic conditions, While inflation remains stubbornly high, growth has so far failed to reclaim the previous peak.
This may mean Governor Carney may look to use forward guidance to set expectations relative to the Fed. For example, if the Fed is currently guiding towards 2015 hikes in policy rates, the BoE may point to 2016 or 2017.
The likely change in approach to communication from the BoE will probably awaken markets from their slumber on the pound, which hasn't done too much more recently. It seems unlikely that the BoE will be actively looking for a radically weaker exchange rate. That already happened in 2009, but has failed to provide a huge boost to activity. The City of London would also be up in arms if the BoE introduced a lot of volatility like the BoJ has done, given how massive financial flows are relative to the size of the UK economy.
All in all, I think gilts will rally a bit relatively and the pound will sell off when Carney takes the helm. But it will probably be a slower process than seen elsewhere.
