Carney's guidance on guidance

Mark Carney Image copyright Reuters

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.