How Many Policy U-Turns Can Mark Carney Make?

Yesterday the Governor of the Bank of England Mark Carney gave evidence to the UK Parliament and as is his wont he aimed to achieve headlines by making announcements about UK monetary policy. These usually involve him contradicting past statements. For example we had Forward Guidance mark one which hinted at an interest-rate rise if the unemployment rate fell below 7%. Well it is now 5.7% and we are still waiting! The latest one involves something of a contradiction of the last set of published Monetary Policy Committee minutes which told us this. The emphasis is mine.

The Committee could also decide to expand the Asset Purchase Facility or to cut Bank Rate further towards zero from its current level of 0.5%. The scope for downward adjustments in Bank Rate reflected, in part, the fact that the UK banking sector was now operating with substantially more capital than in the immediate aftermath of the crisis. Reductions in Bank Rate to below 0.5% were therefore less likely to have undesirable effects on the supply of credit to the UK economy than previously judged by the MPC.


As an aside you may note that the impact of a rate cut on the banking sector of the UK economy was the main priority of the Bank of England. How much more transparent could they be?! However yesterday this changed completely as Mark Carney told UK Parliament this.

“The thing that would be extremely foolish would be to try to lean against this oil price fall today,” Mr Carney told the Lords. “The impact of that extra stimulus . . . would happen well after the oil price fall had moved through the economy and we would just add unnecessary volatility,”


Whilst I agree with the statement about timing i.e the impact would be in 18 or so months time it begs the question of why the MPC Minutes went out of their way to hint at exactly that! It was after all quite a change and another U-Turn in itself as Mark Carney had previously told us that a 0.5% Bank Rate was the “lower bound” for UK official interest-rates. Perhaps it is again at least until the  next U-Turn as he takes policy advice from the delightful Ms. Kylie Minogue.

I’m spinning around
Move out of my way


I’m through with the past
Ain’t no point in looking back
The future will be
And did I forget to mention that I found a new direction
And it leads back to me?

Also I guess one member of the MPC will be wondering if Mark Carney has just called them “foolish”! Will they be allowed to publicly reply?

for one member, the next change in the stance of monetary policy was roughly as likely to be a loosening as a tightening.


I guess that UK monetary policy goes forwards, along the lines that hit the news last night.

I hate these blurred lines


Something of a Bitter Sweet Symphony perhaps for not only Pharell and Robin Thicke as they join Richard Ashcroft in the bad boys club?

Cause it’s a bittersweet symphony, this life
Try to make ends meet
Try to find some money then you die

The Rise Of The UK Pound Has Tightened Monetary Policy

This is not something that the media cover much because we have fallen against the US Dollar which is the currency appreciator right now- look what it is doing to the Brazilian Real and the Mexican Peso as well as the Turkish Lira- and has pushed us back towards US $1.50. However the UK Pound £ has risen strongly against the Euro and is now above 1.41 against it as a somewhat dizzying rise continues. If we switch to the trade-weighted or effective exchange-rate it has risen over the past year from 85.44 to 91.92. Very different from the talk of a weak UK Pound which many have pushed. Indeed if we look back two years we see that at the recent nadir for the UK Pound the effective exchange rate was 78 so we have risen by nearly 14 points or nearly 18% since then.

Thus using the old Bank of England rule UK monetary policy has tightened as follows. Compared to a year ago by 1.5% in terms of Bank Rate and by 3.5% since two years ago.

At this point Mark Carney’s protestations of no interest-rate cuts seems a bit along these lines.

Never believe anything until it is officially denied


Also we need to note the context. You see it is the stuff of economic nightmares for the UK which sees us falling against the US Dollar leading to higher inflation and rising against the Euro making much of our exports less price competitive. I will leave those who welcome the higher inflation to drown in their own contradictions.

At least skiers and holidaymakers will welcome the news as the travel brochures for Europe start to look cheap again.

Retail Prices Continue To Fall

Yesterday Kantar produced more evidence of falling prices.

The latest grocery share figures from Kantar Worldpanel, published today for the 12 weeks ending 1 March 2015, show that deflation has reached a new low of -1.6% as price competition between the supermarkets continues to impact the market.


Sadly they do not appear to know the difference between disinflation and deflation as according to the official figures the retail sales position is strong.

Continuing a sustained period of year-on-year growth, retail sales in January 2015 were estimated to have increased by 5.4% compared with January 2014. This is the 22nd consecutive month of year-on-year growth and the longest period of sustained year-on-year growth since May 2008 when there were 31 periods of growth.


Although the BBC seems to see such numbers differently.

UK economic recovery may be ‘bypassing’ retail sector – says KPMG

Today’s Data

After what has been a pretty good run for UK data in 2015 then today’s production and manufacturing data was something of a cold shower.

Total production output decreased by 0.1% in January 2015 compared with December 2014. There were increases in two of the main sectors, with mining & quarrying output being the largest contributor, increasing by 2.0%.


So disappointing but perhaps mostly driven by falling North Sea Oil output which of course faces a much lower price these days. However then we need to address this.

Manufacturing output decreased by 0.5% in January 2015 compared with December 2014.


That is somewhat different to the business surveys as the Markit Purchasing Managers Index for manufacturing was 53.1 in January indicating growth not contraction. We should be careful about throwing the baby out with the bathwater as these numbers can be volatile and year on year we have growth.

Total production output is estimated to have increased by 1.3% in January 2015 compared with January 2014.


However calls for some perspective also remind us of a deeper one.

In the three months to January 2015, production and manufacturing were 10.4% and 4.8% respectively below their figures reached in the pre-downturn GDP peak in Q1 2008.


Will we ever regain such heights? I am sure that one day we will but your guess is as good as mine as to when. One thing we can be sure of is that it will not be anytime soon!

Also these numbers are not exactly an auspicious start to the Gross Domestic Product or GDP numbers for 2015 but of course they are lightweights compared to the service sector.


There is something of an irony to say the least in Mark Carney’s rebuttal of a Bank Rate cut just as supporters of it would feel that there case has strenghtened! Perhaps he did not check his email inbox yesterday for his early wire on the production numbers but he should be aware of the strength of the UK Pound although with his lack of UK experience he may not be aware of the size of its influence. These are of course added to low consumer inflation numbers.

His apparent return to the concept of a “lower bound” for UK Bank Rate at 0.5% will be of interest to the ECB at -0.2% and also to Denmark’s Nationalbanken at -0.75% as well as the Swiss National Bank at -0.75%! Also Sweden cut to negative interest-rates with an economy growing at similar speed to the UK.

If we look forwards we can consider that until today’s numbers the UK economy was having a solid 2015 but there were clouds on the horizon from the exchange rate. Well the Euro is plummeting and Mario Draghi has just welcomed it.

These upward revisions are mainly driven by the favourable impact of lower oil prices, the weaker effective exchange rate of the euro – and the impact of our recent monetary policy measures.


So as the ECB becomes a currency depreciator what would the Bank of England do if the UK Pound rises to 1.50? Well apart from book a holiday in Europe! i would expect some to call for a monetary policy easing and Mark Carney could easily make yet another U-Turn. His best saviour is that selling the Euro looks too easy right now and no doubt it will not fall every day but we do seem to have an overall trend.


12 thoughts on “How Many Policy U-Turns Can Mark Carney Make?

  1. Hello Shaun,

    only the Iron Lady was not for turning !

    I think he would spin like a top if it meant he’d get his enormous payoff at the end of his term


    PS its only us plebs who get paid in peanuts or popcorn !

    • Hi Forbin

      There was always a Carney plan demonstrated by the choice of a 5 year term as opposed to the normal 7 years. I have always thought that we are a stepping stone to a or the top job at the IMF or World Bank. Maybe that is why he went out of his way recently to criticise the Euro project.

      Also the MPC is beginning to be packed with ex-IMF types! Again this is not in the UK’s interest at a time where and when the IMF is issuing so mnay mea cupas.l

  2. Where are the comics, writers, musicians to expose current establishment hypocrisies? Most high-profile we’ve got at the moment is Noel Gallagher protesting about Apple stealing youth culture (or his album sales). And where are the artists? They appear to be more interested in buying London mansions than making people think. It’s the wrong era for thinking, this is the age of unreality and self-sedation on fake branded lager (premium foreign but brewed here), cigarettes in olive brown boxes, taking a cheap loan for a new fake motor (premium foreign but made here), a 95% mortgage on a brownfield newbuild and monthly HP contracts on all of it, down to the phone and the footie channel and the Ray Bradbury bleeping watch/wrist tag. Thinking will not help get you any of this, in fact, it works in reverse. Why don’t the journalists call Carney out as another faker in a suit? What was the guy in Iraq called, the one who kept saying everything was fine as the Abrams tanks rolled ever closer to Baghdad? And now we have the Fed agonizing about how they can keep hinting that they might raise rates without ever actually having to do it. The word games, the flip-flopping, the false promises…and underneath all of it, still the emergency low rates. An emergency coalition. And more of it come very soon.

    • Hi Peter

      That is a good question. Where are the troubadours, the Dylans and the protest singers? It is the same with other sections of the arts. Have they all sold out? I am a Charles Dickens fan and some of his most famous novels are scathing of the establishment. The catch is that it is so like today….

      Oh and it was Comical Ali I think.

  3. Hi Shaun I think that I’ve found the ideal signature tune for all on the bank commitee.

    W’ere busy doing nothing working the wholl day through
    Trying to find lots of things not to do
    W’ere busy going nowhere isn’t it such a crime
    We’d like to be unhappy but we really don’t have tthe time

    • Hi jrh

      That song is rather applicable for a group who have not changed interest-rates for six years. As to Bing Crosby who was one of the singers he oddly had a role in some of the great songs of the Beatles and the Beach Boys as the BBC 4 series The Sound of Song explained.

      I am a critic of the BBC’s economics coverage but some of the BBC 4 music documentaries are superb.

  4. Thank you very much for telling us about Mark Carney’s testimony before the House of Lords economic affairs committee, Shaun. For me the most interesting exchanges were with Nigel Lawson. Lord Lawson spoke like he was a regular reader of your blog, arguing that low inflation was good for people. He asked why the target inflation rate couldn’t be 1% instead of 2%. I was surprised that Mark Carney actually seemed open to the idea of a lower target rate, since he had certainly seemed closed-minded about it as Governor of the Bank of Canada. He did allow that hypothetically, if technological advances were tending to keep inflation low, it might make sense to lower the inflation target.
    Neither spoke about lowering the target inflation rate in response to a lower upper bias in the measured inflation rate. However, it is distinctly possible. A 2014 ONS paper showed that switching to a chain Törnqvist formula could lower the inflation rate by close to 0.5 percentage points:
    If the CPI switched to such a formula (any formula that passed the time reversal test would probably give a similar improvement) this would imply a 1½% target rate if there were to be no loosening of monetary policy. However, even a more minor methodology change would reduce the upward bias in the CPI and at least pose the question whether the target rate should not be reduced. Right now, the CPI basket is updated in two stages, with COICOP weights introduced with the January update and the weights for representative items with the update. If both changes could be done with the January update, the CPI formula would be much simpler, and upward bias in the index would be reduced.

    • Hi Andrew

      Mark Carney has given another speech today which to confirm his confused state of mind hints at circumstances when a “foolish” interest-rate cut may come! More to your point he in essence says he will take what target is given.

      “Why do we target the low, but positive, inflation rate of 2% rather than a zero or even negative rate?
      The simple answer is because it’s our job, given to us by the democratically elected representatives of the
      British people. We are accountable to Parliament for meeting it.”

      Also you will be interested to know that I have seen an effort at a US HICP but when I have asked about the methodology then I have received the sound of silence! If you use twitter it can be found here

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