By William Schomberg
LONDON (Reuters) - Mark Carney has wasted no time telling investors they are getting ahead of themselves with their bets on when British interest rates might start to rise.
Now the new governor of the Bank of England faces the trickier challenge of giving financial markets clearer guidance on how long borrowing costs are likely to stay at record lows.
Unlike the European Central Bank, which pledged to keep interest rates low for "an extended period" on Thursday, the BoE is expected to get specific when it unveils its plans for so-called forward guidance next month.
Just how specific is a big question for markets which have turned volatile in recent weeks and pushed up yields on government bonds, including British gilts, on concerns about the U.S. central bank scaling back its economic stimulus.
On Thursday, the first MPC meeting chaired by Carney shocked markets when it took the unusual step of issuing a statement to warn investors that they were pricing in a rate hike too soon.
"The Monetary Policy Committee has made it clear what it thinks rate expectations should not be," said Simon Hayes, an economist at Barclays.
"What they need to do now is give a clearer indication of what they think interest rate expectations should be, and that's a much bigger challenge."
Carney is widely expected to back the case for the BoE to give forward guidance on monetary policy, something he pioneered while in charge of the Bank of Canada.
He is due to report back in early August to finance minister George Osborne on the merits of doing it in Britain, including possible indicators for use as guideposts for policy decisions.
Some economists expect Carney to push the BoE to follow the lead of the U.S. Federal Reserve.
The U.S. central bank said last year it will not raise its near-zero interest rates until unemployment falls to 6.5 percent or inflation expectations top 2.5 percent.
Michael Saunders at Citi said his base case was for the BoE to commit not to tighten monetary policy until Britain's jobless rate falls to 6.5 or 7 percent from 7.8 percent now, albeit with a get-out clause if inflation expectations pick up too much.
"Such a framework would set the stage for a long period of ultra-low rates," he said in an email to clients, adding Britain's official budget watchdog expects 6.5 percent unemployment only in 2018.
But a pledge to leave rates on hold for so long could strain the credibility of the central bank and a quasi-target for jobs growth could end up blurring the primary objective of keeping inflation under control.
SIGN POSTS OR TIME LINES?
Some central bank watchers expect that rather than setting guideposts, Carney may prefer to keep rates unchanged until a specific time in the future, again with an inflation get-out clause, as he did in Canada amid the financial crisis.
Carney has stressed the advantages of such a clear message to households and businesses which might be reassured that their borrowing costs will not rise for a long time and spend more.
But that option could be harder to swallow for other members of the MPC, some of whom have expressed their concerns about boxing themselves in on monetary policy.
Carney is just one voice of nine on the Monetary Policy Committee. His predecessor, Mervyn King was regularly outvoted in recent months when calling for MORE money to be created.
Anthony O'Brien, a gilts strategist with Morgan Stanley in London, said guidance based on a number for unemployment could cause some volatility in markets if the jobless rate started to rise, fuelling speculation about whether the BoE might resort to more bond-buying to turn the jobs numbers around.
But over time, specific thresholds for monetary policy changes were likely to guide markets more smoothly.
"With time(-based guidance), you'd probably be going into every MPC meeting asking are they going to remove it this month?" O'Brien said.
Hayes at Barclays said Thursday's first round of guidance had been effective at steering markets but the real test would be keep control over a longer period, given that the BoE would probably have to issue statements after each monthly meeting.
"The measure of success will be how they can shepherd markets, both in terms of getting right path for rate expectations and not getting too much volatility in the process," he said.
(Editing by Mike Peacock)