How many more times will Mark Carney “flip-flop” on UK monetary policy?

24th June 2014 by Shaun Richards

Today sees several members of the Bank of England Monetary Policy Committee giving testimony to the Treasury Select Committee about the May Inflation Report. In particular there will be plenty of opportunity to discuss these two parts of it.

Monetary policy will be set to meet the inflation target over the forecast horizon, while using up wasteful spare capacity, particularly in the labour market;

the outlook for inflation in the medium term remains benign.

That was aimed quite clearly at what was the second effort at Forward Guidance which was to affirm that interest-rates were not going up anytime soon. We now know that the Bank of England Governor had at least a partial change of heart before his Mansion House speech which switched towards hinting at an interest-rate rise. This was odd as the criteria set of “economic developments” in fact pointed in the other direction as the major piece of news in the meantime was this.

Indeed the April annual growth rate for regular pay of 0.4% was the lowest in this series which goes back to January 2001.

So inflation looks benign and wage growth undershoots expectations with the fear that the weakness looks persistent. Hardly a case for a change there. Not much of a case can be made for falling unemployment as a measure as Mark Carney dropped that only in February! Until then an unemployment rate of 7% was seen as a threshold. It would be like the verse of the song “Hokey-Cokey” to put it back in again!

In spite of the fact that there have not been economic developments to justify matters the rest of the MPC seem to be following Mark Carney’s change of mind like sheep following a shepherd. Even arch dove David Miles wrote this about interest-rate rises in the Sunday Telegraph.

But that day is coming.

Although I counsel extreme caution in using David Miles as a seer as this time last year he was voting for more Quantitative Easing on this basis according to the MPC Minutes.

Those projections implied only a modest recovery in growth and relatively little improvement in unemployment.

Since then the economy has grown by 3.1% and unemployment has fallen by 347,000 according to the latest numbers. It is hard to see how he could have been more wrong!

What are they now saying?

As I watch the live coverage of the testimony, it is clear that we are seeing yet another change of not only emphasis but also direction from the Bank of England. Let me give you a flavour of the responses to the questions asked. Firstly the issue of slack in the economy came up and Governor Carney replied that the weakness in wage growth implied that there was more slack than previously thought. David Miles pointed out that there was still a “significant degree” of spare capacity in his opinion. So two individuals who have spoken about Base Rate rises coming over the horizon have in effect just pushed them back behind it again!

In some ways there was worse to come as the newly knighted Deputy Governor Charlie Bean told us it is best to avoid “spurious accuracy” in measures such as labour market slack. Sadly nobody had the nous to ask this “top flight public servant” why the Bank of England had directed people to use a measure it could not reliably estimate?!

The emphasis and hints being provided here were added to when Governor Mark Carney pointed out that some work had suggested that the equilibrium unemployment rate (the lowest rate compatible with non-accelerating inflation) may be more like 5.5% than the 6.5% previously used. Again the clear implication was that there is more slack in the economy in his view than before. Regular readers will be aware that this move was expected.

So we are now being guided away from the hints of a Base Rate rise that came in the Mansion House speech. Whilst this is a success for my “Dark Side” theory as Mark Carney has today admitted that he was trying to influence financial markets with this speech, there is a problem. If we were in America then Mark Carney would be called a “flip-flopper” as we have had a lot of different types of Forward Guidance from an individual who has not yet been in office for a year. Others may be wondering at Mark Carney’s claim that he has met “thousands of businesses” in less than a year which is quite a rate!

Problems with the ability to count are not a strength in a central banker and obvious exaggeration leads to lower credibility.

Fine-tuning of markets

This next section needs to be reviewed in the light of the fact that the Bank of England has had a dreadful forecasting  record over the credit crunch era. We were told by Governor Carney and Charlie Bean that the MPC had felt that market expectations for interest-rates were in the wrong place (too far into 2015) and that this was a driver in the thinking behind the hawkishness on this subject in the Mansion House speech. There is a breathtaking audacity in this as we review the scale of the proposed central planning here. No wonder more and more markets are seeing declining volumes as they increasingly become the playthings of central bankers. Even more extraordinary is that a group of individuals who have a shocking track record feel that they know better than the markets. I am not sure how else one can describe this except as being arrogant. Especially if we look at their track record on this particular subject. Let us remind ourselves how it was supposed to work and jump back to August 2013.

It reduces uncertainty about the future path of monetary policy as the economy recovers. In particular, it increases the understanding of financial market participants, businesses and households of the conditions under which the highly stimulative stance of monetary policy will be maintained.

Odd is it not that those “financial market participants” got it wrong when it was supposed to be a pillar of the plan. However here is the rub as Shakespeare put it. We were first told that Base Rate rises would not happen until 2016 via the forecast for achieving an unemployment rate of 7%. Forward Guidance mark two saw this move into mid-2015. Then Mark Carney at his Mansion House speech moved it firmly into 2014, and now it has been shuffled back into 2015. Exactly what sort of Forward Guidance is this? It looks a rather useless one. Who wants to be led by the blind?

Comment

It would appear that Mark Carney is a fan of the singer Luther Vandross. As this hit of his is apparently the new view on his Mansion House speech.

And I really didn’t mean it
Out of my head to say the things I said
I didn’t mean a word

You could argue that this covers the four versions (including today’s) of monetary policy that we have now had from him. After all he has changed pretty much everything short of ever actually raising Base Rates. The “flip-flopper” badge will remain in people’s minds for quite some time which is exactly the reverse of the claimed impact of Forward Guidance. Perhaps markets have come to the same view as the UK Pound is edging back towards US $1.70 again.

One of the ironies of the situation is that a Bank of England paper has argued that a Base Rate rise would in fact have a relatively small impact on the UK economy. From a Working Paper.

We find that a 1 percentage point increase in the policy rate reduces output by up to 0.6% and inflation by up to 1.0 percentage point after two to three years.

If they are right then the whole debate about the first Base Rate rise is being given too great a significance by the Bank of England.

 

 

 

 

 

 

30 thoughts on “How many more times will Mark Carney “flip-flop” on UK monetary policy?”

  1. Forbin says:

    Hello Shaun,

    Hokey cokey I guess

    you put your Forward guidance in ,your Forward guidance out
    in out , in out

    you shake it all about….

    I think you can guess the rest …

    Forbin

    1. Jim M. says:

      Hi Forbin, hi Shaun,

      While we’re hokey-cokeying in and out we might continue Shaun’s Lutherean reference with a suggestion for Mr Carney (Carney / Carnie more like… another shape-shifting untrustworthy mountebank)

      “Never too much!”

      Mr Bean offers up another cracker for the Liars’ Lexicon…

      “spurious accuracy” … which is presumably what we’re trying to avoid with all these lovely guesstimates that we’ve been discussing of late.

      1. Anonymous says:

        Hi Guys

        Mr.Bean did offer up another good one which was that the Bank of England did not lead people to think that Forward Guidance mark one meant that Base Rates would rise in 2016. What it did do was to set an unemployment rate target of 7% and then forecast it would be achieved in 2016. What did it expect people to think?

        I bet the story would have been completely different if Forward Guidance had been accurate!

  2. Mark G says:

    If it wasn’t so important it would be comical. Certainly doesn’t inspire confidence from where I am sitting.

    1. Anonymous says:

      Hi Mark G and welcome to my corner of the blogosphere.

      Even our political class has spotted this as the MPs pointed out several times today that policy keeps changing. One went so far as to call the Bank of England as being like an “unreliable boyfriend”.

      This completely undermines that claim of Mark Carney that Forward Guidance helps people to invest and plan ahead. I wrote about this from the beginning after all the Bank of England has had a shocking forecasting record in the credit crunch era so it was always likely to get things wrong.

  3. Drf says:

    “How many more times will Mark Carney “flip-flop” on UK monetary policy?” Answer – in perpetuity, for as long as he can play this game!

    1. Anonymous says:

      Hi Drf

      I suspected from the beginning that for Mark Carney the Governorship of the Bank of England was a stepping stone to what he considers to be greater things, Hence the change in the term to five years. So we have just over four years of it left it looks like, unless of course the sort of job he wants is not available at the time.

  4. Paul C says:

    Shaun,
    The papers are full of it, how our desire for high multiple mortgages will be culled by bank oversight and the imminent raise in rates will be enforced by the banks. I think the 0.25% increase is really going to be a damp squib when it finally lands in the Auutmn. Money of course should have been correctly priced for the last 5 years at 5-7% but of course no one and least of all the Govt borrowing could have survived that.
    Any perceived uptick in the economy and strange house prices are all a result of 5 years of financial repression. A rate rise of only 0.25% is only a continuation of that same supression (less 0.25%). If things were normal, really booming and economy then a 5% rate call would reflect true due diligence from our “leaders”
    Here’s hoping.

    1. Anonymous says:

      Hi Paul C

      Sadly such questions do not tend to be asked at such events. For example they could be asked that if the recovery is as good as they say it is why do we still need a Base Rate that according to Mark Carney today said was a low as it could go. This in itself was an odd statement when the ECB has gone into negative interest-rates.

    2. Eric says:

      I think you’re right on the price of money, Paul.

      There’s a point at which the further easing of monetary policy ceases to have the desired effect. The experience of the last 5 years (and the previous 300) suggests that the point is 2%. Reducing it further only helps the banks – borrowing at next-to-nothing and charging you 18%, or more, on your credit card. It doesn’t seem to have encouraged consumers to borrow and spend. ZIRP means emergency; and emergency creates fear.

      And of course, any interest rate should reflect the risk. How much interest do you really want for lending your money to a bust bank? The FSCS isn’t a free guarantee. Savers are paying a huge price.

      The MPC has dug a hole and is now finding it very difficult to fill it in again. They plan to fill it in very slowly with very small pieces.

      They will tell you the alternative would have been worse.
      Worse for who?

  5. Pavlaki says:

    Again I question the statistics the governor is working with and the apparent inability to forecast the economy with any degree of accuracy at all! I begin to wonder if the B of E should have representatives who’s job it is to get out and talk to businesses both small and large to get a better feel for things. Relying totally on economical statistics appears to guarantee that they are behind the curve in most matters and not feeling the pulse of he economy. The governor is an intelligent man and I am sure that if the stats were telling a more accurate picture then he would as well. Where do you think that the B of E is missing input that could improve its poor forecasting record?

    1. dutch says:

      I’d question the methodology the governor is working with.

      All this making the 1% richer,’trickle down economics’,asset bubbles,bailing out banks has created a sesspit of debt that we can’t climb out of.

  6. Fraser Bailey says:

    These people are nothing more than the developed world’s equivalent of witch doctors. Why anybody gives any credence to a single word they say is beyond me.

    1. dutch says:

      Bit harsh on witch doctors fraser…

    2. Anonymous says:

      Hi Fraser and welcome to my part of the blogosphere.

      In essence central bankers attract attention because they have power! Indeed the credit crunch has seem them be encouraged by politicians to use ever more of it. There has been a takeover of much of economic policy by them and many markets now dance to their tune. So there is an interest in what they say but the intelligent will note that their credibility and credence is falling as fast if not faster than their rise in power.

  7. Anonymous says:

    Thank you very much for this column, Shaun. I wouldn’t know
    when anything happens at the Bank of England if I didn’t read your blog. At the TSC hearing, Governor Carney may have made a Freudian slip regarding Martin Weale. He said that when forward guidance was introduced in August, Mr. Weale was the sole dissenter on the MPC, because he disagreed about the “appropriate
    level of the inflation knockout”. However, this was not what got reported at
    the time.

    http://www.ft.com/intl/cms/s/0/15fe9250-050b-11e3-9e71-00144feab7de.html#ixzz2c9eXz0Rz

    According to FT, writing on August 14: “One of the three…’knockouts”,
    that _ if breached _ will force a rethink on guidance is that the MPC views it more likely than not that inflation will breach 2.5 per cent between 18 months and two years from now. Mr. Weale thinks this time horizon is too long.”

    During the press conference on August 13, Paul Wallace of The Economist said: “Given the first knockout, one interpretation of that would be that you’ve – or the MPC has temporarily raised the inflation target to 2.5%.” It seemed the obvious interpretation of that knockout. The rebuttal from Governor Carney was unconvincing. One wonders if Mr. Weale didn’t have similar qualms about effectively hiking the target rate of inflation by half a percent and he just didn’t want to express them in public. So Governor Carney wasn’t really mischaracterizing his dissent; he was revealing what he said in private ratherthan in public.

    This is not really strictly a historical issue. The unemployment
    knockout may have expired in February but the inflation knockout doesn’t seem to have been altered in any way, and still seems to mandate a 2.5% target rate of inflation. Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      The odd bit about Martin Weale’s role as a dissenter is the way that he only did so once. From the August 2013 MPC Minutes.

      “One member of the Committee (Martin Weale), while supportive of the adoption of forward guidance, voted against the proposition in order to register his preference for a time horizon for the first inflation knockout that was shorter than proposed. He nevertheless intended to form his future judgements about the application of guidance and the knockout criteria in line with the framework adopted by the Committee.”

      So is he now for or against and what about the time up to now?

      As to the minutes I find myself being reminded of the brilliant definition of them by Sir Humphrey Appleby in Yes Prime Minister, which reinforces your point.

  8. GusBmth says:

    Hi Shaun

    Even in a working paper, the Bank;s language is deliberately confusing:

    ‘We find that a 1 percentage point increase in the policy rate reduces output by up to 0.6% and inflation by up to 1.0 percentage point after two to three years.’

    What they mean, I think, is that output would be reduced by up to 0.2% per annum and inflation would be up to 1.0 percentage point lower in years 2 and 3. Up to 0.2% in the context of GDP numbers is almost a rounding error.

    This is a tacit admission that ultra loose monetary policy is quite ineffective in stimulating economic activity, (pushing on a string) but does push up inflation. However, I think their analysis is quite flawed. The impact of a rise in the policy rate depends on timing and doesn’t follow a simplistic model. By allowing inflation to rise above 5%, they also caused a fall in real wages, which depressed economic activity. A rise in rates at that time may well have increased output – a point that you argued, a voice of reason in the wilderness. The impact of a 1% rise in rates at this time depends critically on the assumptions one makes about the impact on the currency and of course the housing market – the elephant in the room for any discussion about monetary policy in the UK.

    The Bank has supported the housing market at artificially high levels through ’emergency’ levels of interest rates and liquidity in order to protect the banks. From here, it is difficult to imagine what the desired outcome for the housing market is from the Bank’s viewpoint. Price rises of 0 to 3% combined with nominal wage s growth of 4% underpinned by productivity growth allowing a very gradual revaluation of the market? Maybe they’re hoping to very gradually raise rates when wages finally start to grow and maintain a ‘goldilocks’ not too hot not too cold housing market.This is an impossible task to achieve, especially given the Bank’s inability to forecast anything about the economy with accuracy.

    If an institution sets itself an impossible task, it is hardly surprising that its members look like flip-flopping chumps in trying to achieve it.

    1. Anonymous says:

      Hi Gus

      As you point out there are various issues with this type of analysis. My suggestion would be that the Base Rate rise impact would not rise in a straight line. For a while nothing would happen at all and all the action would be in year 2 and 3 . Hence the importance of getting ahead of the curve.

      Also the impact will differ as to where we are in interest-rates. The Bank of England is not so keen on that as it is afraid that the last cuts were pointless and may even have done some harm.

      Where we are and what we are thinking at the moment in time matters too in what is an ever growing list!

      1. GusBmth says:

        When economic historians look back at this period, I suspect their conclusion will be quite simple – ‘too much for too long’; Base rate cut too low, the last tranches of QE ineffective, neither policy error reversed in a timely fashion.
        The danger of being behind the curve is the need for a rapid response in the future, risking a second ‘great recession’ – not a certainty, but sadly a probable outcome.

    2. Eric says:

      Hi Gus,

      The MPC should not be in the business of setting itself tasks – impossible or otherwise. Its remit is clear. To keep inflation on target and support HMG’s economic policy with respect to growth and employment. They don’t have dual objectives. The remit is reaffirmed by the Chancellor in March every year – lest they forget.

      But these days it’s looking more and more like the Chancellor’s Back Office. An office full of – as you say – chumps.

      On the other hand if the MPC wants to (try to) run the country they should stand for election.

      1. GusBmth says:

        If the MPC had targeted an inflation measure that included a realistic measure of house price inflation, we might not have ended up in quite such a mess. If they were targeting that now, we’d have had a very different monetary policy. Sadly, as you say, they act more like the Chancellor’s back office than an independent central bank.

  9. Noo 2 Economics says:

    “Indeed the April annual growth rate for regular pay of 0.4% was the lowest in this series which goes back to January 2001.”

    An interesting nuance to this appears here – http://www.vocalink.com/about-vocalink/news/press-releases-2014/vocalink-take-home-pay-index-real-pay-growth-continues-for-ftse-350-employees.aspx.

    Whilst it relates to take home pay in May for the FTSE 350 rather than gross pay throughout the UK in April it provides an insight into who the winners and losers are.

    1. Anonymous says:

      Hi Noo2

      Thanks for the link. The message is not that dissimilar is it? Higher numbers than the official ones but still weak pay growth. I do not see the Bank of England doing anything until they think that wages have picked up. As to the link they might want to reconsider this bit “real take home pay growth is slowing on the back of a fall in inflation to 1.5%.”

      1. Noo 2 Economics says:

        Er yes! Because you are tying to talk down wage growth implying that it is failing to keep pace with inflation when the numbers mentioned in the link are already adjusted for inflation and show real wage growth albeit at a snails pace.

  10. Noo 2 Economics says:

    Hi Shaun,

    Face it, currently, despite protestations to the contrary Carney is looking at one thing and one thing only – the housing market.

    He sees the MMR looking like it’s beginning to bite and take the heat out of the housing market so he thinks he’ll leave rate rises a little longer. Earlier when he spoke of “this year” the latest stats said the housing market was roaring ahead. I don’t think he cares if the economy overheats (as I think it is becoming likely to) and inflation goes up – in fact all the better for debt.

    I also believe all the UK authorities are scared to death of a repeat of Thatcher’s great blunder at the end of the 80’s as she almost doubled rates in 2 years thereby making hundreds of thousands homeless as they failed to keep up their mortgage payments which in turn lead to a jump in social security expenditure and then the inevitable housing market slump and recession in the economy.

    So if you want to know where Forward Guidance is going next – watch the housing market.

  11. Eric says:

    Good stuff again Shaun,

    I still quote your memorable line – “a group of people in a dark room fumbling for the door handle” – the fumbling just gets worse.

    I don’t know how much more of Fred Karno’s circus I can stand.
    There must be an appropriate song from weird Al Yankovich; like – “Canadian Idiot”

    Geeeezus, what a mess.

    1. Anonymous says:

      Hi Eric

      Sadly for the purposes of satire in the UK Green Day wrote about an “American idiot”! Oh and the group in the dark have found neither the door handle nor the light switch.

      1. Anonymous says:

        An American idiot can have a wide geographical spread from the Yukon to Tierra del Fuego. So I think Carney qualifies as American ….

      2. Eric says:

        Yes but Weird Al said the Canadian Idiot was up to something and recommended a pre-emptive strike.

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