Carney's guidance on guidance

 
Mark Carney

Three weeks on, the word in the City is that the Bank of England's bold experiment in "forward guidance" has flopped.

Mark Carney's implicit message in his speech today was: "Give it time - and if that doesn't work, rest assured that the Monetary Policy Committee will give it something else."

Expectations of future interest rates have risen since that guidance was offered, not fallen, as Mr Carney might have hoped. If that starts to impede growth, the governor said, the Bank "will consider carefully whether, and how best, to stimulate the recovery further".

He also wanted households and businesses to realise that the official Bank rate was the interest rate that mattered most to them.

It's no surprise that long-term interest rates - the rate on 10-year government debt, for example - have risen. Those have gone up nearly everywhere, in response to rising long-term rates in the US.

But in framing its guidance, the MPC had hoped to affect market borrowing rates for two- to five-year loans and below, which are obviously more directly affected by medium-term expectations of the official Bank rate.

As the governor admitted in his speech, those borrowing costs have also risen in the past month. Instead of expecting the first bank rate rise towards the end of 2015, markets now seem to expect it in the first half of that year.

There are two possible explanations. One is that investors and traders - looking at all the good economic news lately - now expect the UK unemployment rate to fall much faster than the Bank does, reaching the new 7% threshold in time to raise bank rate earlier in 2015.

The other possibility is that they simply don't believe that unemployment will set the pace of rate rises: either the MPC will be forced to raise rates, in response to rising inflation, or it will simply go back on its promises, as growth picks up.

Governor Carney repeated today that he doesn't think a faster-than-expected fall in unemployment is likely. Neither, it seems, do most City economists.

A growing population and rising labour force participation mean that the economy has to create around 20,000 jobs a month, just to prevent the unemployment rate from going up.

If productivity - output per head - even just goes back to growing at its long-term trend, we might well not see job creation at that pace over the next year or two. If there's more catch-up growth in productivity, unemployment could well rise before it goes down.

Are investors really that much more gloomy about the UK's productive potential than either the Bank or many city economists? Perhaps. Or maybe they just don't think the 7% threshold will ultimately be binding.

Whatever the explanation, Mr Carney and the Bank continue to have a different view of Britain's economic future from the financial markets. They also seem to have a different view of the Bank's capacity to turn its forecast into reality.

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

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  • rate this
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    Comment number 137.

  • rate this
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    Comment number 136.

    @135
    "...gloomy about the UK's productive potential..." meaning that the UK's productivity would have deteriorated less temporarily than economists assume, so that a given level of output requires more working hours. Bear in mind that aggregate weekly hours worked are already at their highest ever, while output is more than 3% below its peak.

  • rate this
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    Comment number 135.

    Interesting article but I am puzzled by your comment "Are investors really that much more gloomy...than either the Bank or many city economists" It seems they are taking a more optimistic view and assuming a more rapid increase in employment surely?

  • rate this
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    Comment number 134.

    133 addendum

    This underpricing WAS the fools gold at the heat of interest rates being far too low under Eddie George and then Mervyn King - and they knew about what they were doing at the time - I have my exchange of letters on the subject with both Eddie George and then Mervyn King.

    All they did was to wring their hands and say they only had to manage to the 2% target - WHICH WAS A FIDDLE!

  • rate this
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    Comment number 133.

    How to fiddle the RPI & CPI...

    Simple - influence changes in the basket of products and their mix.

    BoE let imported Chinese deflation fiddle the UK index thus allowing products priced in an substantially undervalued currency - such that if the product was made here it would be selling at a loss. This fiddle let the cretins at the BoE grossly underprice money the cause of the bubble & crash!

  • rate this
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    Comment number 132.

    The growing lending taking place is a good news, but. But, it is driving prices up and we have not finished sorting the prior. The price ride will bring increasing pressure to raise interest rates. That is the way it works despite the damage this will do, it is the way things work. Ex-Leman's Mr Morton might be able to explain.

    History is confused as to where Canute set his example?

  • rate this
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    Comment number 131.

    130 The Itinerant ex-pat
    According to the bankers I've spoken to Mervyn King is to blame for not raising interest rates.
    126 Me
    Another way to lower your personal inflation is to have a big income and invest.
    The proportion of income you spend on anything is therefore reduced and if invested wisely you should achieve a real rate of return.
    Alan

  • rate this
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    Comment number 130.

    @113. I've yet to hear a banker say anything was their fault. Unless anyone can give an example.

    So I'd say you're right. When the bust banks begin to crack again under the strain of bad debts Mark will say it is the markets what done it!

  • rate this
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    Comment number 129.

    @127
    I agree that CPI doesn't measure the economic experiences of real people (that was exactly my point). But the measures are certainly not "inconsequential" when monetary policy targets them and when they are used to determine levels of benefit or pay increases, or the "controlled" prices of essential services.

  • rate this
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    Comment number 128.

    @126
    Indexing at the macro level is the root of many evils. In the context of welfare payments, it is fundamentally unjust. Why should pensioners receive a smaller increase just because the price of petrol has not risen, when they do not have a car? Why should vegetarians get more just because the price of meat has risen? CPI is too crude a measure to base monetary policy on, let alone benefits.

  • rate this
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    Comment number 127.

    @124 Grounder
    Inflation measures become inconsequential when a couple earning avge incs have to be paid Benefits to get by. When others leave cars on driveways or even sell them because they cannot afford to travel or pensioners skip a meal in order to put the heating on.

    That is the situation we are in now. RPI & CPI do not measure that

  • rate this
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    Comment number 126.

    124 Grounder
    Too complicated. CPI or RPI is essential for indexing purposes at the macro level.
    One can work out a personal inflation rate given income and expenditure profile from websites.
    The way to reduce personal inflation is to have an allotment, a small house, switch off lights and TV, wear layers in winter, don't have a car and eat less.
    And have a partner or a hot water bottle.
    Alan

  • rate this
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    Comment number 125.

    So what if interest rates go up a bit earlier than expected.
    It could help focus the minds of debtors and stop a housing bubble.
    The economy shouldn't be run on the basis that everything should to be done to help those who take out loans whether they be businesses, individuals or governments.
    Alan

  • rate this
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    Comment number 124.

    @123
    Very true! The alleged "massaging" simply adjusts for changes in relative proportions of actual expenditure, of course. This is why we need measures of inflation that are aligned to household and consumer profiles. Pretty soon you'd end up with indexation of welfare benefits on the basis of the recipient's profile. Economic good sense, but is it preferable to scrutiny of actual spending?

  • rate this
    +2

    Comment number 123.

    114.SRB
    Inflation, it seems, will be managed in future by simply adjusting the methodology rather than interest rates.
    ~
    If you go for practical instead of theoretical economics, the actual lack of £ in people's pockets counts for more than massaged inflation figures.

    If you ain't got it ...

  • rate this
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    Comment number 122.

    Carney's talk yesterday was more symbolic than substantuive. His point was that the future of this country lies in real production and not in financial services. Why else would he choose the regional location of Rolls Royce, JCB, Toyota UK, Boots and a whole host of SME's manufacturing and exporting. Time for the Govt. to channel its cash from overseas aid, war etc and into UK manufacturing.

  • rate this
    +1

    Comment number 121.

    @118
    The various measures of UK inflation all have their flaws, but if you have any evidence that they are susceptible to "manipulation" then please do give us a clue where to find it.

  • rate this
    +1

    Comment number 120.

    I wonder if he gets his wallpaper from Osborne & Little? It is all very pretty, reflects a positive humour but will it last? We will know a bit more eighteen months down the road. Events, dear boy, events.

  • rate this
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    Comment number 119.

    Why is he paid so much more than King was ?
    Rip off !
    Still Britain should earn good money from the Izraelis for joining their war on Syria !

  • rate this
    -3

    Comment number 118.

    Carney's a bright guy, but he's shackled by a system of manipulation of monetary measures, inflation statistics & - let it be said - the truth. Mismanagement of these epic proportions can only end badly - thankfully the markets can see through the BoE's shadowy world of pseudo-forms, & can communicate the underlying reality in a stark way.

    #117 - agree (platinum & silver too)

 

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