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.
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?
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”.