Beware the Carney premium

Mark Carney

Why would it matter that the governor of the Bank of England may be behaving like an "unreliable boyfriend" - in the words of Labour MP Pat McFadden - blowing "one day hot, one day cold" on when interest rates will rise?

If interest rates are bound to go up some time, is there any material economic impact from the different signals from the Bank over the past year, and especially in the past few days, about when the end of almost free money will formally begin?

Just to remind you, last summer the Bank's novel "forward guidance" - tying rate rises to improvements in the labour market - implied no rate rises until 2016.

Then, when it became clear that the Bank's forecast of how fast unemployment would fall was far too pessimistic, expectations of the date of the first rate rise were progressively brought forward to various dates in 2015.

Then forward guidance was modified to become less formulaic and more a judgement about slightly nebulous spare capacity in the economy - on the basis that prices are likely to accelerate when slack in the economy has been exhausted, because businesses would be more likely to respond to increased demand by putting up prices.

And because determining spare capacity is more art than science, the governor's pronouncements on it take on much greater significance. If the data can no longer speak for itself, any interpretations of ambiguous economic evidence by the governor are understandably seen as a broad hint of what the Bank of England plans to do.

In this oracular incarnation, at the Mansion House last week, the governor nodded to a possible rate rise in the autumn - and as a result sterling rose and the price of financial assets adjusted to discount such an early rise.

But yesterday the tea leaves had apparently changed: Mark Carney seemed to row back again, with remarks suggesting underlying inflationary pressures may yet be too subdued to warrant any kind of rate rise till next year.

The pound fell, and investors started betting again on a rise in interest rates perhaps postponed until next year.

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If Carney really is an unreliable boyfriend, in respect of monetary policy, then the cost of money for all of us would become more expensive”

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Which probably leaves you feeling a bit confused about when the Bank of England will start to raise the cost of money for the first time since its policy rate or Bank rate was cut to 0.5% in March 2009.

"Who cares?" you might ask.

Surely a bit of uncertainty never did any serious harm - especially since the Bank of England has been consistent in saying that, as and when rates rise, the increases will be small, and that Bank rate over two or three years is unlikely to climb above 3%, thus remaining well below historical norms.

Well I have been talking to bankers and investors who control squillions of pounds and they say the to-ing and fro-ing, the blowing hot and cold in McFadden's words, could come at a cost to the UK.

How so?

Well investors and lenders dislike volatility and unpredictability, they reward predictable borrowers and punish unpredictable borrowers.

And they do this by demanding a higher interest rate, a so-called risk premium, for borrowers who are deemed a bit flaky.

So if Carney were to thoroughly bemuse the markets about the likely path of interest rates, and the yo-yoing of sterling intensified, while the price of interest-rate linked assets also became more volatile, there would be an increase in the risk premium or interest rate paid by anyone borrowing in sterling - including the government.

In other words, if Carney really is an unreliable boyfriend, in respect of monetary policy, then the cost of money for all of us would become more expensive - and that would have a deleterious effect on growth and our prosperity.

The Carney risk premium is not yet being demanded by the UK's creditors yet. But his girlfriends in the markets seem to be increasingly losing patience with him.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 30.

    It would appear that hedge funds, gambling banks and of course labour who seem to have no credible financial policies do not have a high opinion of Mr Carney I would consider that a first class endorsement

  • rate this

    Comment number 29.

    What is all this fuss about? Mark Carney is selling the notion that interest rates will have to rise. How very sensible of him. Interest rates are incredibly low and have been for a long time such that a lot of people assume this is the norm. He wants to raise awareness that they will rise without actually raising them now and causing a mad panic. All very sensible.

  • rate this

    Comment number 28.

    I guess any rise in interest rates attributable to the capricious Carney will only affect borrowers not savers.

  • rate this

    Comment number 27.

    "his girlfriends in the markets seem to be increasingly losing patience with him."

    Well, no. The marriage has been consumated and the honeymoon period is over. They're stuck with the man they thought they wanted!

    Time for these corporate girlfriends to lay back and think of England.

  • rate this

    Comment number 26.

    The only central banker I take seriously is Mario Draghi, President of the European Central Bank. What that man has had to deal with over the last few years, is incredible--and how well, and with what dignity and integrity, he has done so. Still, no one at the BBC pays him any attention. Maybe his low profile a good sign, though. Like good football refs, good central bankers should go unnoticed.

  • rate this

    Comment number 25.

    The UK's eggs have all been put in one basket, Banking. Over the last 30 years all governments have done everything possible to destroy our own manufacturing industries, The only industry that has been promoted by governments in this country is foreign owned. Do a trade deal in China, and what's the deal ? come and build us power stations. Why can't we do these things ourselves? No investment.

  • rate this

    Comment number 24.

    Mr Carney is astonished by the way the British behave. Particularly speculating on housing, taking money from others without doing any proper, the British disease?

  • rate this

    Comment number 23.

    If Carney were my boyfriend, he'd have been dumped by now.

  • rate this

    Comment number 22.

    Pretty sexist comment. Just saying.

  • rate this

    Comment number 21.

    "then the cost of money for all of us would become more expensive - and that would have a deleterious effect on growth and our prosperity"

    And if the bank raises interest rates?

    then the cost of money for all of us would become more expensive - and that would have a deleterious effect on growth and our prosperity.

    Its win win all the way for the banks :-)

  • rate this

    Comment number 20.

    Just remember what is said in public and things that are done in private are two very different things

    There has been very little knee jerk reaction from the markets to MCs statements because they are for public consumption the big players get/give the real forward guidance in private

    It’s all to prepare the public for change and gauge our reactions, if you have debt get ready for a rise etc

  • rate this

    Comment number 19.

    From "Taper Tantrums" to "Unreliable Boyfriend"

    Is forward guidance a valuable economic tool or an "independent" political mouthpiece.

  • rate this

    Comment number 18.

    Does anybody seriously think it matters who is at the BoE or what the BoE says. If so please post the historical facts showing this influence

    As for the ridiculous BoE fan chart that covers all eventualities, well they can always be right cant they

  • rate this

    Comment number 17.

    Politicians, Bankers and Foreign exchange traders, all you need is some Italian Music and Al Pacino and you could film a trilogy.

  • rate this

    Comment number 16.

    Carney thought he could tie his rate change decisions to social issues (unemployment) as he was expecting a correlation and hoping he could claim causation. Then the correlation disappeared, and he can't claim causation.

    Or to put it another way, he's playing politics rather than doing his job properly.

  • rate this

    Comment number 15.

    It would seem that Mr. Carney is also taking account of the political picture in the UK.
    Any interest rate rise will be unwelcome before the next election.
    So the only option becomes to, "forward guide" that they may rise "sooner",( with further U turns possible.?)

    As is often the case in these matters, there is the smell of the politicians hanging over this issue

  • rate this

    Comment number 14.

    we see the BoE with their judgements often get it wrong. Why not look over past rate setting, and draw out for say 10 key indicators [inflation, unemployment, house price index etc] and see what rates movements should have been in retrospect, removing knee-jerks etc. We then have an algorthym model on reality that markets can understand and we get generally better rates for the economy.

  • rate this

    Comment number 13.

    It is all part of the ongoing Central Banker game to hoodwink the general public they are saving the world. The Fed Reserve board members have been doing this for years. The bottom line is we cannot afford to raise rates due to our massive debt pile. Sadly it can only end in tears.

  • rate this

    Comment number 12.

    Carney and the MPC have always resolutely declined to hint at a timetable for increasing Bank Rate. In view of this, they found it "somewhat surprising" that markets were so sure it would not happen in 2014. By gently reminding everyone that this is certainly a possibility, the market's reaction has reduced the likelihood. Mission accomplished.

  • rate this

    Comment number 11.

    You can only rig the system for so long...


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