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 54.

    and no a mention of the DEBT levels held by the UK. It is this overhang from the Goormless Brown Time that is hold the UK back.

  • rate this

    Comment number 53.

    49. BigbadBri

    I did none of those. You should have more imagination.

    "the biggest growth periods in FTSE history" - so was the Tulip bubble, the Tech binge and so was the South Sea... one can only hope the Queen closes the Stock Exchange for another hundred years once this one goes bang...

    Q. Given the economy of every industrialized nation is below 2008 levels? Why the confidence? A trick?

  • rate this

    Comment number 52.

    We need to get back to sound monetary principles. Ripping off savers to artificially prop up the housing market is perverse. Why are we trying to resurrect a failed system that failed us badly.

  • rate this

    Comment number 51.

    I'm sick of all the fancy words, false promised and backtracking.

    Why don't they just get to the nub of the point - the point which is very clear to the rest of us. The point they think they are cleverly concealing and therefore earning their 100's of thousands of pounds in wages and simply state the truth?

    The truth being that they won't raise rates until they are forced to do so.

  • rate this

    Comment number 50.

    This job must be hard, gotta set interest rates. Hmm. Thats okay - as you are, see you in a years time, off on holiday, text me if inflation goes up and I'll nip back and put them up a bit. Ta ta for now

  • rate this

    Comment number 49.

    @48. So you sat out one of the biggest growth periods in FTSE history because you think it is frothy? And you kept your money in a savings account? Your bank must ADORE

    From below 3600 in 2009 to 6700 now. You should have optimised your ISA since 2009 at least..

  • rate this

    Comment number 48.

    28. Alan

    "Savers should stop complaining and put more money into shares paying attractive dividends of 4% and more."

    put money into that frothy equity market? you are having a giraffe! a Danish one... divs will last only as long as this asset class remains overpriced propped up by QE funny money and the financial institutions playing their high freq trading games. Once readjustment happens...

  • rate this

    Comment number 47.

    No Robert. This has provided a respite and MUST continue to do so if and until a sustainable recover takes hold.
    Even then a form of this is required to try and reduce, it will never be completely broken, the impact of Boon and Bust!!!
    The continuing excesses of the capitalist system need to be moderated if not by self regulation, it will never happen! Then by regulation.
    More to say no space!!!!

  • rate this

    Comment number 46.

    @28 Alan Exactly.
    It is early stages of a recovery; inflation is near 2% & unemployment at 7.1% is still not great. If you can swing it then you want low interest rates to encourage loans to private business to create more jobs. The housing stimulus can be reined back if it causes trouble.
    Rates will rise but only globally (watch the US Fed) & slowly.
    Forget savings accounts! Try a Growth ISA.

  • rate this

    Comment number 45.

    8_Ace @40
    "financially responsible

    Credit for the direction of an economy - to glory or to ruin - lies with the "financially responsible", not just govt, tax-collectors, public-service paymasters, but the actual owners of wealth and power of income

    IF "sick & tired" of social atomisation costs, to those 'most excluded', in 'welfare', and in planetary neglect, agree cure: equal partnership

  • rate this

    Comment number 44.

    I was told in the 60's that saving money under the mattress was depriving the economy of investment.
    Investment would cause the economy to grow, and interest payments would be the reward.
    Well my deposits are losing value now, so my money is not causing the economy to grow. I guess my money is competing with free money.
    It's a way of saying that money is not worth anything.

  • rate this

    Comment number 43.

    Is he a banker or a politician? Not that it matters an awful lot because I don't trust either.

  • rate this

    Comment number 42.

    well that was worth waiting for, bank rate will rise when , er , its economically appropriate for bank rate to rise, a real revelation, no one could have guessed that in a million nanoseconds

  • rate this

    Comment number 41.


    Lacking the capacity for democratic self-direction, our worries 'reduce' to being about 'their' management of 'our economy'. Is it 'efficient', for a combine-harvester to be used as a lawn-mower, its function literally to maintain race-tracks, golf-courses and the view up to the ha-ha?

    Lacking cradle-to-grave participation, we feed an army of 'insurers', funding our enemies

  • rate this

    Comment number 40.

    The economy is now hooked on the financial heroin of low interest rates. Either we start to cure the patient of their addiction gradually and safely or it will be catastrophic Cold Turkey further down the line.

    The financially resposible are sick and tired of being fleeced to a) prop up this "recovery" and b) get this lot elected again.

  • rate this

    Comment number 39.

    " 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."

    Sorry, Robert, you were wrong. The facts and the Governor's words speak for themselves. "The objective is not to have forward guidance forever. The objective is to have a recovery that moves into ... a sustainable and balanced expansion."

  • rate this

    Comment number 38.

    Don't these muppets realise that the more people spend on just getting to/from work and housing costs especially rents, the less people have to spend elsewhere in the economy.
    It's all very well base rates at .005% but what do businesses have to pay to borrow. What do people have to pay on their credit cards.
    Meanwhile, those that saved for a pension are hit with paltry annuities,

  • rate this

    Comment number 37.

    @33. Parallel

    "The Tory Party will not walk on by while Pensioners and Savers are hit"
    Osborn 2009

    Cue Dionne Warwick, I think


    Yes, it is nearly up there with Gordon Brown's "no more boom and bust" just before the deepest recession this country had seen in peacetime.

    Just goes to show you shouldn't believe what a politician says, regardless of what rosette they have pinned on their lapel.

  • rate this

    Comment number 36.

    So much relies on a recovery, but even the most authentic, amazing, prodigious cannot repair the damage that has piled up. So many worthless paper "products" are in existence sucking the future into their "black hole".
    Silly pantomine stories served up for ever.
    So much of the "growth" of the last thirty years has been fictitious, real wages for most have declined but your house is worth more. Ha.

  • rate this

    Comment number 35.

    Bob you have the wrong end of the stick he gave a schedule of 0.5% increases. (Which he won't keep as the BoE forecasting is dire!)

    Carney said expectation of 2% by 2017 and up next start of 2015

    So 1% by 2015 1.5% by 2016 and 2% by 2017.

    He is still, and he acknowledges it, short of where rates should be.

    The house price bubble must be prevented from crushing the economy too! = rebalancing.


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