What now for UK monetary policy and the “forward guidance” of Mark Carney?

29th August 2013 by Shaun Richards

Yesterday we received the first keynote speech from the new Bank of England Governor Mark Carney. It was eagerly awaited because the first weeks of his tenure have exhibited something of a bi-polar character. Whilst the economy has turned for the better anyone with any sense realises that this was driven by events before he commenced his term and that he has been lucky. However his main policy and indeed innovation has had a very troubled start. In July he told markets that they were pricing UK future interest-rates too high and then at the beginning of August he followed it up with this.

In particular, the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%.

If he hoped that this would lead to expectations of lower interest-rates then Mark Carney will have been disappointed as I discussed on the 6th, 8th and 14th of this month. As he stood up to speak he faced a higher value for the pound sterling and both higher interest-rate futures and Gilt (government bond) yields. So he looked rather like King Canute as we wondered if he would also be King Lear.

I can resist anything except temptation!

Just like Oscar Wilde, Mark Carney could not resist the temptation to bask in the improvement in the UK’s economic fortunes.

The signs are that this recovery is broad based and set to continue.

This was enough for UK Gilts and interest-rate futures to sell off one more time and raise interest-rate expectations further. We had not even reached the end of paragraph two! If we go back to August 8th I pointed out this.

If we look at the contract for June 2016 which had closed at 98.42 the day before those who thought that they had the “early wire” pushed it up to 98.56 before the announcement but afterwards it plunged to 98.24.

As I type this the June 2016 contract is trading 98.07  which means that it is pricing in a rise in interest-rates of over 1% by then. Even worse for Mark Carney half of this expected increase has come since he made his formal “forward guidance” statement. This seems to me to be an example of what David Bowie was singing about here.

Yeah, yeah, yeah – up the hill backwards
It’ll be alright ooo-ooo

Remember also that the international environment and fears about intervention in Syria look set to encouraging flows to safe havens which will be a downward influence on UK interest rates.

The Press Conference Started Badly Too

The first question from Rebecca Barry of Channel Five went as follows.

We spoke to a businessman in Nottingham this morning who said that his bank would rather see him  go bust than give a new loan.What promises can you give him and other businesses that banks are on their side?

Mark Carney looked very uncomfortable which he tried to hide with a smile and did not properly reply and all we got was the claim that their had been “some improvement on the margin”.

So it looks as if we will remain a bankocracy on his watch…

What about savers?

The prospect that interest rates might stay at their low level for longer will not be welcome for savers.

All savers reading that are probably shouting too right at the screen! But they should fear the next bit as Mark Carney has this for them.

Tremendous sympathy

Isn’t that what you say when someone has died?

This reminds me of the words of deputy governor Charlie Mr. Bean from just under three years ago when questioned on Channel Four.

Q: This bad news for savers is the point of what you are doing?

A: Yes

This financial repression of savers has been something which has had (presumably) a much stronger effect on the UK economy than those applying it realised. Accordingly it is one of the reasons why we have yet to even get back to pre-credit crunch levels of output.

Mark Carney did hold out a carrot though.

instead what savers need is a stronger economy…… A strong economy is in all of our interests, as it will deliver better job prospects for our friends, neighbours, children and grandchildren.

Are savers the only people expected to behave with altruism in this crisis?

The inflation strategy is unchanged

This was a clear case of Pete Townsend and the Who’s “Meet the new boss, same as the old boss” as the quotations below illustrate.

Let me reassure you that our mandate to deliver price stability has not changed.

So for an organisation that has not hit its inflation target since November 2009 this was not particularly reassuring, especially if you read the next bit.

The Bank of England’s remit recognises that, at times, it is appropriate to bring inflation back to target more slowly in order to avoid unnecessary volatility in output.

Also some price increases are apparently less important than others!

CPI (Consumer Price Index) inflation is currently being pushed up by rises in utility prices and tuition fees that do not reflect the underlying pressure of demand.

Many will be wondering how long a little longer actually is?

 the MPC is prepared to bring inflation back to the target over two years or a little longer

The output gap

This concept had gone a little quite. After all those who espoused it found themselves predicting all the wrong things and those of them who can be embarrassed were. On a scale of one to ten I would say that its failure was around ten. But apparently like the Terminator it too was quietly saying “I’ll be back”

Meanwhile the UK economy still produces 3% less than it did five years ago

If we add in the forecast that inflation will be under control then we are back to the same failed output gap or “spare capacity” theory. Indeed reading between the lines Mark Carney seems to be implying that there is a large output gap.

Of course one can argue that this is merely a justification for a pre-planned policy.

Lucky number seven

So far each of Mark Carney’s policy pronouncements involve this number.

I can confirm today that, for major banks and building societies meeting the minimum 7% capital threshold, the Bank of England will reduce the level of required liquid asset holdings. The effect will be to lower total required holdings by £90 billion,

Perhaps it is his favourite number….

Whilst this is an attempt at a stimulus some care is needed. After all, UK banks have hardly rushed to lend in recent times. But it will help boost their profits as the bankocracy takes another step forwards and with Help to Buy the risks of property lending will be lower for the banks, if not the rest of us.

Indeed we were told that the housing market is in better shape than we think.

Households’ debt servicing costs relative to income are below their 20-year average, and houses cost the same relative to earnings as they did in 2003.

If he actually believes that then it seems a little odd that he is renting and not buying! Or that he was given a £250,000 a year rent subsidy.

What about income?

If we look further into the income situation I note that we were told this.

Households have reduced their debt levels and are now spending out of income.

Dear Mark Carney, is it out of this income?

UK employees’ average hourly earnings have fallen by 8.5% since 2009 in real terms (after adjusting for inflation).


The fundamental contradiction of “forward guidance” about keeping interest-rates low for longer is that it is happening in a recovery period. Contradictions are something that financial markets leap on in a flash and that is exactly what they have done. Indeed they have probably marked up UK yields and expected interest-rates by more than they would have done otherwise. Thus by this route we note that so far in twitter terms it deserves #failure.

As we stand, Mark Carney has managed to be a smooth operator and hence the opposite of his predecessor in this regard. He has shown intelligence in putting Jane Austen on a future bank note but as to his announced policy I suspect that King Lear was right.

Nothing will come of nothing

As ever there is a darker road just like in King Lear and it goes as follows. Mark Carney has privately decided that interest-rate rises are indeed on the horizon and wishes to leave the blame for them firmly on financial markets. It would be a policy recognisable to those familiar with the antics of his past employer Goldman Sachs and in such a scenario it is us who are the “Muppets”.




9 thoughts on “What now for UK monetary policy and the “forward guidance” of Mark Carney?”

  1. Andy Zarse says:

    With regard to Britain’s savers, the reason they’re called savers is because their principal use is to
    “save” the economy. And if these foolish people hadn’t realise this fact then they should have read the Key Features Document properly.
    On the other hand I’d like to know what comes after all the savings have been used up or moved into other assets and there’s none left?

    1. max says:

      Or how about, what happens to the legions of borrowers who realise that saving is a mugs game, and borrow beyond their means thinking interest rates will stay low forever?

      We are up sh*t creek without a paddle.

  2. JW says:

    Hi Shaun
    Yes, your last para sums it up nicely. It was really cute when he said that the ‘special relationship’ didn’t mean the UK’ rates weren’t determined by the FED. Ah, what a lovely fairytale.

    His post rationalisation will be that he had to act on rates when it was clear that inflationary pressures were too high.

    1. Anonymous says:

      Hi JW

      Yes his comment was all the more unusual for the fact that he later stated that

      “There has been a generalised upward move in long-term yields in advanced economies, including the UK, over the past month. The main common driver is speculation that the US Federal Reserve will soon reduce the pace of its asset purchases. That has – not surprisingly – affected yields in other countries because safe, liquid sovereign bonds of the world’s largest economies are close substitutes for each other.”

      So we simultaneously do and don’t!

      He will blame “the markets” rather like the Euro area did with its “wolfpack” comments…

  3. Paul C says:


    I am glad that you are keeping tabs on our very own disciple of Goldman Sachs. Regarding interest rates, certain parties close to the money font will always enjoy cheap finance (banks) and those further away will be left to “Wonga finance” although I did notice a new payday lender “Sunny Days” who are muscling in, they only charge 49% APR (if you have a guarantor).

    The inflation is of course disposable income painful for the oldies who save due to their “war years” generational habits but there is a lack of messaging in the media that the Government and banks have contrived to ensure that those oldies of which many own semi-detached properties are still worth £350K (when really it cost them only £90K in real terms and the fabric of those properties have generally degraded over their ownership)

    You might want to characterize this “new norm” as one of state-run financial ponzi, no new physical assets are created, only the old ones are rented, those monies are collected upwards into the centre and a certain set of “trusted elites” who prop up the self-fulfilling circle.

    So it is not all bad, only by perception of minority parties or those that have a longer-term view on economic matters (further than 5 years ahead).

    1. Anonymous says:

      Hi Paul

      This mixture of asset price inflation and real income falls (especially for savers) has the potential to be a toxic mix. It is one of the reasons I wanted a proper measure of house price inflation (such as house prices….) in the CPI and also why we did not get it!

      Some older savers will have more valuable houses but this currently favours Londoners so the nature gets ever more random. On the other side I guess is those who have rented and saved as for them there are only further and further slides downwards.

  4. Anonymous says:

    Very funny and very apt, Shaun, especially the part about King Canute.

    Governor Carney said that people shouldn’t get excited about rising housing prices because houses cost the same relative to earnings as they did in 2003. Four years later there was the run on Northern Rock that started the financial crisis in Britain, so that’s not such a reassuring statistic. He should be careful or he won’t be able to sell his house and move back to Canada when markets are at their peak.

    Governor Carney said not to worry about rising housing prices because there is always macroprudential regulation. This was the way things were done when he was governor and mortgage debt expanded very substantially. The overnight rate was kept on hold, and now and then Minister of Finance Jim Flaherty would step in to micromanage the mortgage market to reassure people that things weren’t getting out of hand. As governor of the Bank of England, British people can expect more of the same only now Carney will do the micromanagement himself.

    When he made his written statement to the UK Treasury Select Committee in January Mr. Carney was upset that the BoE’s target inflation indicator didn’t include homeownership costs, and was enthusiastic about the CPIH, which he didn’t seem to know very much about, even the year it would first be published. Now presumably he knows more about it, and therefore isn’t enthusiastic about it. Even a carney barker would have difficulty promoting the merits of the CPIH in fighting a housing bubble. And Carney seems to have got over his distress at the CPI excluding homeownership costs. After all, there is always macroprudential regulation.

    1. Anonymous says:

      Hi Andrew

      Mark Carney has made a couple of mistakes now about the UK economic landscape. He also told a press conference that measures of inflation expectations were on the higher RPI rather than CPI when the Bank of England’s own survey does not distinguish the two.

      We also had regulation in the run-up to 2007 except it failed!

  5. Anonymous says:

    Hi Shaun,

    I’d like to touch on utility prices – especially electricity. Entergy are shutting the Vermont Yankee reactor “because low electricity prices make continued operation uneconomic”.

    I note that US utility share prices have recovered nicely from 2009, where CEZ shares are still very low. I received the following from CEZ investor relations

    “You were commenting on share price decline and I was trying to explain that it is largely driven by development of power prices in Germany, which are the same as power prices in the Czech Republic. The power prices determine revenue and thus profits of our power plants, which generate 70% of groups‘ profits. Other Czech businesses contribute
    roughly 25% and only 5% comes from the Balkans. So the regulatory
    developments in Balkans are not helping but certainly cannot explain 50%
    drop in share price over the last 2 years.

    Over the last 2 years power prices at which we can sell our output have
    declined from 58 to 37 Eur/MWh. This means that annual revenues expected by the market from us are now EUR 1.3bn lower compared to 2 years ago (21 Eur price difference multiplied by our annual production of 60 mil MWh). Deteriorating margin outlook from our power plants is the key driver of share price performance. In Albania we invested roughly Eur 240m and the business was contributing EUR 40m operating profit in the past. Those are minor amounts compared to what decline in power prices means to our future profitability.

    If you do not want to compare CEZ to E.On than look at Finish Fortum or
    Austrian Verbund. They both are equally hit by declining power prices as
    us and are not facing nuclear shutdowns as Germans.”

    CEZ are trying to claim all European generators are struggling. I was very surprised to read about declining German power prices, and have asked what is their reference. German households and industry are being hit by increased electricity costs, caused by high renewable energy costs. Personally I believe that inefficiency, overstaffing and corruption are a significant drag on the CEZ share price and I’ve suggested it’s time to replace the top director with someone who can fix these problems.

    Returning to UK electricity prices, I’m curious to know where the extra revenue is going. Scottish & Southern shares have risen about 30% since 2009. The renewable energy policies must contribute to rising consumer electricity costs.

    Comments please.

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