The challenge ahead for Mark Carney

Mark Carney, governor of the Bank Of England, attends a monetary policy committee (MPC) briefing on his first day inside the central bank's headquarters Some people seem to think Mr Carney can use some new tricks to strengthen the recovery.

The good news for Mark Carney is that the UK economy is looking healthier than when he was appointed at the end of last year.

If he's lucky, things will start to do better, without the new governor having to administer a miracle cure.

That would be good news indeed; not only does he not have any miracle cures at his disposal, but even the extra tricks that people do expect him to deploy are not very well understood.

Some people seem to think Mr Carney can use those new tricks to strengthen the recovery, while also doing a better job of meeting the inflation target. In reality, he's likely to have to choose between those two goals - at least in the short term. And he might not actually be able to deliver either of them.

"Forward guidance" is the big one: the City is expecting him to push for this inside the Bank, in the next few weeks, as the monetary policy team debates how to make the inflation target more growth-friendly, as the chancellor has requested.

In effect, forward guidance means promising not to change interest rates until Y. When Mark Carney did it in Canada in 2009, "Y" was a date - he promised not to raise rates for at least a year.

In the end, the economy recovered so quickly, he had to go back on his promise, and raise rates earlier than expected, though, in truth there had always been small print in there about inflation and developments in the economy.

Forward guidance

Since then, opinion has moved in the direction of "state-contingent" guidance: you don't say you will keep rates unchanged until a particular date, you say you will hold rates until unemployment has fallen to a certain rate, or maybe, until the economy has returned to where it was before the crisis.

There'll be plenty to say about this, if and when the Bank does go for some form of "forward guidance". But a few points to note now:

First, the critics of forward guidance, and there are plenty on the MPC, are right to say that the policy "ties" the central bank's hands. That's the point.

The theory behind forward guidance is fairly technical, but the basic idea is that you want to tie the central bank's hands because you want to convince the markets that the bank is really going to stick with the plan of boosting the real side of the economy, even when your normal policy rules might have suggested you start taking rates back up again.

If the markets and ordinary households all really believe this, they will act as if that recovery is going to happen, and so actually make it happen more quickly than it might have done otherwise.

Or that's the theory.

Is there room for this kind of guidance to make a positive difference in the UK? Many say there is more room now than there was two months ago.

Rising rates?

The ructions in the international financial markets over the US central bank's policy mean that long-term interest rates have risen by more than half a percentage point.

So, credit conditions have tightened a bit, without the Bank doing anything. The City is also now expecting UK official rates to rise in the second half of 2014. Surveys suggest that many consumers expect them to go up even sooner.

If Mark Carney and the rest of the MPC are keen to prevent long-term rates from rising any further, and/or do not now expect to raise bank rate until late 2015 or early 2016, it's possible that "guidance" to that effect could help change those things, in a useful direction.

A Bank of England sign is displayed outside The Bank in London, England. Flexible on inflation?

But it's important to understand how this policy would work, if it worked at all. For any promise to affect the economy, it needs to change behaviour, by changing how people think the Bank will behave in the future.

Specifically, it needs to make people think the Bank is going to be more focussed on supporting growth than we previously thought, and more relaxed about inflation - at least over the next two or three years.

The bank needs to convince investors and ordinary punters that it will be even more "flexible" in his interpretation of the inflation target than Sir Mervyn King was. That might come as a shock to those who think the Bank has been plenty relaxed about inflation already.

Keeping promises

Of course, once growth does pick up, the Bank could go back on its promise, to keep a handle on inflation - or at least refer people to the small print, as Mark Carney did in Canada in 2010, when he raised interest rates sooner than he had previously "guided" the public to expect.

That's another curious thing about forward guidance: it's all about the central bank convincing the public that it means business, but the more successful it is in doing that, the more likely it is that the Bank will need to wriggle out of its perceived commitment.

The larger point is that forward guidance can make the trade-offs between the economy and inflation more explicit, and the likely policy response to them more nuanced. But it cannot make those trade-offs go away.

You can hope that Mark Carney will finally bring inflation down. Or you can hope that he will use forward guidance, or some other magic, to give extra support to the economy. But there are not any policy options on the table that will achieve both of those things - or at least, not without a lot of help from the economy itself.

Mark Carney needed to ask directions for the best exit at Bank tube station on Monday morning. No wonder - there are plenty to choose from. There aren't so many good ways out of this for the UK economy.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 65.


    Agree totally. The BOE's mandate is to keep inflation at 2%. Since the crisis this has been completely abandoned. Is this why Sterling is worth 25% less than before the crisis, creating hgh inflation and general poverty all round, with NO export benefit.

  • rate this

    Comment number 64.

    mr carney's domestic problems include
    a) the mismatch between the term of funds deposited with the banking system and the term of the residential property mortgages that they finance
    and b) dealing with the gross overvaluation of the same property for lending purposes
    it will be a test of him to see whether he even admits this, let alone whether he dare deal with it properly

    politicians daren't

  • rate this

    Comment number 63.

    How long can ANY country keep borrowing?
    All we are currently doing is reducing the speed our overdraft increases. Is the new man going to help? Is anyone able to help?
    None of whats going on makes any sense does it? Neither do any of their solutions. The only way is down.

  • rate this

    Comment number 62.

    There are many people projecting their own wishes onto Carney. They need to work out that Carney is a human being before they start criticising him for not doing what they want him to do. He is his own man so lets sit back and watch what he does rather than scribble fiction.

    The place needs a clean up and that's for sure but nobody is going to get out a broom as it isn't their job.

  • rate this

    Comment number 61.

    60: A US blogger ? Creating Dollars bit.
    I suppose Monsieur Carney could back the Pound with Gold, make Gold Sovereigns freely convertible to pounds at a set price.
    But physical Gold is a problem for everyone at the moment isn't it ?
    Better pull in more of that second hand scrap Gold while they can get it cheap.

  • rate this

    Comment number 60.


    Maybe. But when (or if) growth really gets going, commodity prices will snap back with a bang - it is a simple matter of scarcity.

    As for China, they are playing a 'relative scarcity' strategy. They are converting dollars into resources, and the calculation is this - we are creating dollars, but we are not creating resources. They have got it right.

  • rate this

    Comment number 59.

    55: Welfare, Social Security, Police, Fire, NHS, Street Lights, Bin Collections, and so on.
    They all sound expensive when your not using them, but when you want them, and they're not there, well that's when you realise what they are worth.
    Money in the Bank won't help you if you need a good A&E department.

  • rate this

    Comment number 58.

    56 Carry the coals to high speed train...built by the Chinese. With China investing heavily in raw materials, BBC has asked if Australia is planning for an end to the boom in these mineral resource commodities. I think the answer could very well be yes. If it is, China's investments will look like an incredibly dumb move. They'll undoubtedly say it's for the long term.Good excuse.

  • rate this

    Comment number 57.

    If the good news is the economic upturn, the bad is why it has happened - by "helping" first time buyers to take on mortgages that they won't be able to afford when rates rise, the govt has injected some life (and confidence) into property markets.

    But this remains an economy whose only means of growth is borrowing. Good, if you think borrowing £4 to 'buy' £1 of growth is fine - but is it?

  • rate this

    Comment number 56.

    @6 JFH
    prescient comments there
    PPF taking over UK coal, I guess MC could get involved in the energy solutions if he so wished.
    some would say back door renationalisation
    which goes first ...the pension funds or the industries....

  • rate this

    Comment number 55.

    48"He'll do his bit to advance the anti socialist American agenda"

    If it works we should try to get people like him into high places in Germany, France, the EU too. Oops, it's not necessary. The ones they've got so far are doing a fine job of wrecking things there already. Carry on "chaps!"

  • rate this

    Comment number 54.

    "anti socialist American agenda, finish off welfare and social security"

    You know I'm really looking forward to this. And to think he's a Canadian! Perhaps he may also just manage to produce a little alchemy whilst he's one the job.

  • rate this

    Comment number 53.

    39"The comments here claim that he is an overpaid incompetent who takes credit for the work of others.."

    That was the essence of BBC's reporting of him.Watch it again.

    48"He'll do his bit to advance the anti socialist American agenda, finish off welfare and social security..."

    Better than cyber syping. How effective an idea. Got my fingers crossed.

  • rate this

    Comment number 52.

    "less Social Security"

    Well that's a positive then.

  • rate this

    Comment number 51.

    49: Lord Carney of Threadneedle Street won't be upsetting his friends in the old boys network.
    They all love him, ones who have any power approved of him, and the others all want to be as rich as he is.
    So, fundamentally no change, just more Stagflation less Social Security, more misery for the ordinary people.

  • rate this

    Comment number 50.

    just listening to the HOL committee on the Eurozone Crisis simultaneously with the Treasury Select Committee where Andrew Bailey is holding forth on the Coop disaster and Verde.
    You honestly couldn't make up the hot air that has circulated in Westminster today.
    this blog 1bn times more sense
    Yes Boris, frack under Westminster as soon as possible,(engineering not your strong point??
    Save us MC

  • rate this

    Comment number 49.

    the old boy network in the city will make his life as difficult as possible, the public school club will do their best to stop his reforms / carry on business as usual. Thereby keeping the gap between the poor and the rich as wide as possible. Split the banks up casino & retail, make it a criminal offense to miss sell or deceive the consumer, serious jail time 10yrs, control pension pots better.

  • rate this

    Comment number 48.

    46: He won't do any of those.
    He'll do his bit to advance the anti socialist American agenda, finish off welfare and social security, and preside other the continuance of one of the worst Depressions the west has seen.
    Bow before your new Master !
    Other and we're stuck with Stag flation !

  • rate this

    Comment number 47.

    (cont. from #45)

    ....Carney's best legacies to the UK would be to change the focus of the BoE away from money supply trickery; to publish honest inflation statistics that reflect the realistic shopping basket; to end the artificial repression of interest rates; and to re-orient economic reform towards genuinely productive activity. Do this, and you'll be a giant in UK history books...

  • rate this

    Comment number 46.

    IMO Carney needs to throw his weight behind 1) raising the 3% reserve ratio 2) separating banks' retail and casino operations 3) ensuring that misselling is treated as a criminal offence 4) stopping "going behind the regulators' backs" lobbying by the banks 5) senior executives of banks which fail are fined and lose their pension pots 6) appoint John from Hendon as his deputy.


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