Mark Carney’s almost promise on rates

Mark Carney

For most people, the most important thing the governor of the Bank of England said today is that the interest rate the bank controls, the Bank Rate, will not be raised for some time and could still be as low as 2% in 2017.

For Bank watchers, perhaps more important is how he has ditched the simple revolutionary system of so-called forward guidance on the future path of rates, introduced only last summer, for a more complex and fuzzier approach (and see the note I wrote last night for more on this).

The Bank's Monetary Policy Committee had in August said a rise in interest rates would not be contemplated till the unemployment rate was 7%.

But with that threshold set to be breached within weeks, years earlier than the Bank had originally expected, the governor is now saying that rates won't be raised till the slack or spare capacity in the economy is on its way to being eliminated.

Mark Carney wants this to be seen as a bold statement that the Bank remains committed to supporting further falls in unemployment and long-delayed improvements in living standards.

Many will see it as almost a political statement, a statement to a hard-up nation that the Bank is on its side.

But it is slightly less clear what it means in respect of monetary policy and economics.

The Bank has published an estimate that the economy currently has spare capacity equivalent to up to 1.5% of GDP or national output.

It says at least half this gap is due to people being unemployed or under-employed, and that it does not expect the gap to be closed for more than two years.

Which supports Carney's almost-promise that money will remain very cheap, that interest rates will remain at historic lows for years.

But he also categorically refuses to give any kind of binding commitment to keep rates low for a specific period.

And he concedes that the Bank's estimate of the output gap and the rate at which it will close are bound to be wrong.

Or to put it another way, the big change between Carney's Bank of England and that of his immediate predecessors is that they refused to talk about what they thought the future path of interest rates would be, whereas he relishes making non-binding, very general statements that interest rates should remain low - unless the Bank of England's view on spare capacity turns out to be wrong.

That feels like a cultural difference. And maybe it is economically significant, if somehow businesses and households take confidence from it and therefore invest and spend more.

But here is the thing.

The Bank of England priority remains the same as it ever was, to keep inflation at more or less 2% over the forecasting time horizon (albeit that since 2009, and till recently, this was a target consistently overshot).

Now the moment the Monetary Policy Committee were to decide that inflation was rising above 2% in a sustained and pernicious way, interest rates would rise.

And that judgement would be made in more-or-less the same way today as it would have been under Carney's predecessors, King and George - namely on an assessment of whether the economy was growing above capacity, bringing the risk of self-reinforcing rises in wages and other costs determined by domestic demand.

So Carney's focus on spare capacity is not such a break with the past.

And in that sense, it does not seem unreasonable to argue that forward guidance, in the form it was sold just a few months ago, is in the dustbin of monetary history.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 254.

    @253 All for All "we can try fairly to test our own thoughts"

    It is the grandest of delusions to believe one understands one's own thoughts, so I would not presume to judge whether I do, in fact, understand my own better than another's, or another's better than they themselves.

    The policy was wrong but, following guidance, it is now right, on balance, to leave Bank Rate at 0.5% for a few months.

  • rate this

    Comment number 253.

    Even with All Eyes, even with universal freedom of conscience (secure in agreed equal partnership) we never can know all 'the thinking' of such as independent MC, power-playing CL, young DC or the Older, but we can try fairly to test our own thoughts as to what forces bear on theirs, of character & context, in what they say, how they say it & what they miss out: the output gap?

  • rate this

    Comment number 252.

    @251 All for All "I would commend again the Internal Eye, freedom to follow conscience. Not eyes of All on All"

    Commend away!

    The Internal Eye will increasingly be joined by the eyes of all. The motives for resisting this will be suspected, increasing mistrust. Rarely will all agree to avert their gaze, and rarely will there be no risks in so doing. The Internal Eye will never supervise alone.

  • rate this

    Comment number 251.

    Grounder @250
    "Its power ours?"

    My point meant to be less esoteric! Simply that what is discoverable by people in one culture, probably will occur to other people in systems, in our terms, of character quite different. Amongst those discoveries might of course be drivers to convergence, or common flight!

    I would commend again the Internal Eye, freedom to follow conscience. Not eyes of All on All

  • rate this

    Comment number 250.

    @249 All for All 'Is not "its power" ours?'

    It could and should be, but who can aver that it is so. This medium of our collective will is perverted by its many imperfections, each to be exploited (if not by me then by another). Not Big Brother's, but (increasingly) the eyes of All are upon All: some assurance of fidelity but never a guarantee that our power will be used with civic responsibility.

  • rate this

    Comment number 249.

    "why would we doubt its power?"

    Is not "its power" ours? We advance by the imagination and effort of generations, helped or hindered roughly as much (allowing for starting points) by whatever system we are born in. For me it is now more than four decades since I first heard Charisma speak Nonsense, a twinkling eye, a way with words, asking & surely knowing what is wrong: not telling.

  • rate this

    Comment number 248.

    247. All for All "Is that what it is! Or will be?"

    Clearly this is not how things are!

    But when we see how effectively the mechanism can produce insanity, why would we doubt its power to produce sanity, given the trustworthy direction of its faithful crew?

    "The new multilateralism ... needs to instill a broader sense of social responsibility on the part of all players" ...multilateralists each!

  • rate this

    Comment number 247.

    Grounder @245
    "the blind justice
    of dispassionate global economics
    mediating the folly of all
    to supply the simulacrum of sanity…"

    Is that what it is! Or will be? "We cannot" hope, but "can expect".

    Proviso noted, of "trustworthy hands"!

    Back to equal partnership. Virtually nil on representation from CL.

    Difficult enough to see & do 'right thing', without having to weigh school-fee options.

  • rate this

    Comment number 246.

    245. All for All "As if ... we can hope to evaluate for every decision a maximisation of global benefit"

    We cannot. But we can expect the blind justice of dispassionate global economies, mediating the folly of all, to supply the simulacrum of sanity...

    ...provided that trustworthy hands are on the tiller, scrutinised by the keenest lookouts in the crew, in the eternal vigilance of all for all.

  • rate this

    Comment number 245.

    "would not listen"
    Still expecting 'corporate responsibility' - financial system to support productive economy - without liberation of all (secure equal partners) for individual responsibility. As if - against all experience, reason & credible imagination - we can hope to evaluate for every decision a maximisation of global benefit made in our minds conditional on 'our own advantage'!

  • rate this

    Comment number 244.

    Re my previous comment242 should have read "class warfare"

    Anyway, who would want to be governed by a couple of fish - Salmon (sic) and Sturgeon. Lets be rid of Scotland and the fishes.

  • rate this

    Comment number 243.

    @239. All for All "we don't want to be hitting 1% much before say next April, do we?"

    To some extent that depends on how quickly an increase passes through to borrowers. Certainly I would not listen to calls for a reduction if Bank Rate were already 1%.

    If 0.25% can be digested without signs of de-railing the recovery, then a further increase would be in order before we allow the APF to shrink.

  • rate this

    Comment number 242.

    Sounds like like "Red Robert" - son of Labour Peer and Balliol, Oxford - has declared war on everyone but Labour - most of whom also went to Oxford - Miliband, Balls, etc

  • rate this

    Comment number 241.

    JfH @238
    "a very grave error"

    Yet, it works. Dog-fight flying by the seat of pants.
    Distinction btwn proper (mark to fantasy) accounting & fantastic (pseudo-proper) accounting, too fine for pilots, too late from referee

    Reasonable stability, including money rates, of course an 'essential' feature for confidence on all fronts; but hard to keep up, & uncertain of meaning, without equal partnership

  • rate this

    Comment number 240.

    @238. John_from_Hendon "drawn up on the basis of wishful thinking and make believe by fantasists"

    One man's "wishful thinking" is another's honest appraisal of risk. I agree that the market should validate the risk assessors' opinions, but only if it is functioning relatively normally (whatever that may mean). Marking to a potentially defective market is an unacceptable systemic risk.

  • rate this

    Comment number 239.

    "To Everyman
    no material negative
    (in) a 0.25% increase"

    Probably right. John's 'few casualties'

    But we don't want to be hitting 1% much before say next April, do we?

    A hike of 30% for the 'lucky' at BR + 1.5%; a last-straw hike of 10% for the already stretched at BR + 4.5%

    And worrying that once 5% in prospect, John might be lost to The Cause. All of us glued again to rate hopes?

  • rate this

    Comment number 238.

    233. Grounder

    You are making a very grave error. You are assuming that the accounts of the banks have some meaning - they don't.

    For well over a decade the accounts have essentially be drawn up on the basis of wishful thinking and make believe by fantasists.

    Until the accounts are drawn up properly on the basis of 'full mark to market' no one will know.

    Basel 3 NOW!

  • rate this

    Comment number 237.

    @236 All for All "low rates helpful all round, for now."

    Many pre-2009 borrowers will have seen nominal increases in incomes, if not real ones, while interest costs have fallen. If 0.5% was right five years ago, a higher rate is right today. To Everyman, a 0.25% increase will have no material negative impact. Savers would be negligibly better off and new annuitants a little more so, for life.

  • rate this

    Comment number 236.


    Back to ordinary: sham democracy, more of crisis & war?

    Or on to rational: agreeing real democracy, zero output-gap?

    Acceptance by those who matter of 'ordinary' vulnerability, crises & wars, long ago told of our need to re-set more than private commercial 'minting'. Have faith: 'those who matter' have some care for those who must serve or wait: low rates helpful all round, for now.

  • rate this

    Comment number 235.

    @234. The J Hoovers Witnesses "Their notional assets, the property interests by mortgage, are what keep their books nominally in balance."

    I think it's the notional value of the loans (secured on property or not) that sustains the illusion of balance. The value of the cashflow from loan interest and repayments can be much higher than any underlying security, so long as borrowers keep paying up.


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