Will Governor Carney ever actually raise interest-rates as opposed to making promises?

Today is one of the set piece days for the UK economy and in a nice accident of timing we also got the main economic variable of these times. The set piece is the Bank of England Quarterly Inflation Report which has developed a track record of telling us where inflation and economic growth will not be! Well what should we expect from an organisation which regularly competes to be the worst forecasting body in the world? If that seems harsh then let us step back the policy horizon -monetary policy takes up to 2 years to work fully – to May 2013 to see what we were told.

Inflation is likely to remain above the 2% target for some time as the contribution from administered and regulated prices persists over the next two to three years.

Okay so inflation would be above target now and whereas fact the latest reading is shown below.

The Consumer Prices Index (CPI) was unchanged in the year to March 2015, that is, a 12-month rate of 0.0%, the same rate as in the year to February 2015.

So another arrow misses the target and do not hover in the background as the Bank of England sprays its forecasting arrows over a wide area. You might get hit!

As an individual forecast the Bank of England would have a case to respond by saying that the oil price fall of late 2014 was virtually impossible to forecast ahead of time. But the problem is that this is now a long sequence of errors and it has been wrong again and again. When inflation was well above target it continually forecast it would return then when it finally fell it was forecasting above target inflation. This matters because it sets monetary policy based on this so if your forecast is wrong so is the policy.

It was only yesterday that I explained an effect of this which is the continual changes in the explanation of how we are told QE works. As inflation soared it was obviously awkward telling people it was to inflate the economy so the original message found itself redacted and replaced.

Let me take the opportunity to critique the whole system. We know that the credit crunch era has increased uncertainty and led to “surprises” so it is logical to admit that one can forecast say 6/9 months ahead at best. What is so wrong with the truth? I think it would earn the Bank of England some respect if it admitted this openly.

What economy does the Bank of England face?

Today’s numbers provide something of a contrast and contradiction to the latest economic growth figures which showed it slowing to a 0.3% increase in GDP (Gross Domestic Product) in the first quarter of 2015. This is most clearly provided by the employment numbers.

There were 31.10 million people in work, 202,000 more than for October to December 2014 and 564,000 more than for a year earlier.


The proportion of people aged from 16 to 64 in work (the employment rate) was 73.5%, the highest since comparable records began in 1971.


Employment increased by 0.7% on the previous quarter

As you can see the quantity measures for the UK labour market remain very strong as employment continues to push ever higher and in fact reaches the highest level for 40 plus years. If we switch to another measure as a check we see that total hours worked continues to push higher as well.

Total hours worked per week were 998.6 million for January to March 2015. This was: • 2.4 million (0.2%) more than for October to December 2014 • 20.2 million (2.1%) more than for a year earlier • 84.2 million (9.2%) more than 5 years previously.


For the first time in a while we also saw some optimism and sunshine from the wages figures.

Comparing January to March 2015 with a year earlier, pay for employees in Great Britain increased by 1.9% including bonuses and by 2.2% excluding bonuses.

I prefer the overall figures as the money in our pockets does not know if it is a bonus payment or not. But if we now factor in the inflation figures we see that we are seeing real wage growth of the order of 2% if we use the official CPI measure or around 1% if we use the Retail Prices Index.

Indeed if one wants a real dose of spring sunshine the March figure on its own rose by 3.3% driven by a 4.3% rise in private-sector wages on a year before. Some care is need with monthly figures though and especially at this time of year as the seasonal adjustment factor is high. That latter fact will be welcomed perhaps by public-sector workers who saw their wages fall by 0.9% on a year ago in March! A flicker of a sign of austerity as private and public-sector wages diverge by so much?

Output and the labour market

Another way of looking at the situation is to look at output per head which is the basis of the productivity figures. Sadly this morning’s release gives us a clue as to how grim the picture is here as if we take 2008 as our benchmark it has fallen by 1.7%. This is very different to the recorded output figure.

Output is now 4.0% above the level at the start of the economic downturn in Q1 2008

So we are producing less and the situation yet again points at our services sector as it has grown by 8.5% over this period.

The Bank of England U-Turns

After a long period of incorrect optimism on UK productivity the Bank of England seems to have changed its mind. Firstly it updated us on recent developments.

Four-quarter hourly productivity growth remained weak

That hardly lifts the mood but then we got the meat of its views.

The MPC’s best collective judgement is that productivity growth will pick up gradually over the forecast

So not now then but over the next couple of years or so. This poses something of a problem for future wage growth as over such a period they are likely to be highly correlated. This is a problem for a Bank of England which told us this as recently as February. Ben Broadbent on productivity and wages.

So yes, it’s faster than we’ve seen in the three or four years since the crisis and therefore earnings growth is also faster.

So have the hopes for faster earnings growth gone too? As the Bank of England made a big deal of this only in February this would be quite a change! In essence the new argument is that employment growth has essentially been in low productivity areas which if you think about it is only a restatement of what we know has taken place.

So a downbeat message here ironically very out of kilter with today’s wages numbers.

What about the value of the UK Pound?

This Inflation Report gets a mention of this area in very early.

In effective terms, sterling is around 2% higher than in February and 16% higher than its trough in March 2013.

If we use the old rule of thumb for this area which the Bank of England has apparently forgotten the rise in the value of the Pound since March 2013 is equivalent to a 3.5% increase in Bank Rate making its equivalent value 4% now as opposed to 0.5%.


Today brings some very mixed messages especially as the Governor of the Bank of England Mark Carney would have known the labour market figures at 9:30 am yesterday. Was it too late to get the Inflation Report back from the printers? We had one of the best sets of labour market figures for a while – albeit with care required on wages – which are accompanied by the Bank of England changing its mind about its bullish optimism on wages. Indeed even the growth forecasts have been nudged lower.

If we move to the promises of interest-rate rises well they remain that just promises and they are always around the corner are they not? We get a hint around market yields but as you can see that is rather a way ahead.

under the assumptions that: Bank Rate rises gradually to 1.4% by 2018 Q2, in line with the  path implied by market interest rates;

Another hint is for a rise in interest-rates this time next year. Er weren’t we told that last year at the Mansion House speech?

But the bottom line remains productivity and wages which means that the Bank of England has in fact moved away from an interest-rate rise despite its proclamations. Indeed if the UK Pound remains at such elevated levels any downturn in the UK economy would likely lead to a cut. After all there are a lot of mentions of other central banks doing that in the Inflation Report and Governor Carney can be described thus.

They seek him here, they seek him there,
His clothes are loud, but never square.
It will make or break him so he’s got to buy the best,
‘Cause he’s a dedicated follower of fashion.






12 thoughts on “Will Governor Carney ever actually raise interest-rates as opposed to making promises?

  1. Hi Shaun,
    If we knew the real state of the Banks we might be in a better position to hazard a guess (or forecast) when interest rates might rise. Or to state the reverse – the fact that interest rates look to be firmly welded to the floor could indicate that the Banks are still bust; which leads one to wonder just how much further asset prices have yet to rise before interest rates can even begin to rise.

    The causes of the credit crunch and the long slow drag to real recovery (i.e. a recovery built on rising productivity not just cheap money) coupled with an abysmally cloudy crystal ball must surely demonstrate to the Govnr. that nothing can be relied upon and he’s taking a huge risk in saying anything at all – suppose 6-month forecasts were wrong!. So much for Forward Guidance and the huge pay packet that goes with it.

    Finally, here’s the last sentence in one of the economics textbooks (Frederic Benham) I used in my 1960s studies – “The basic truth that in the long run standards of living depend on the volume of output [per worker-hour] is the most important lesson that economics has to teach.”

    • Hi Eric

      Thanks for the mention of Mr. Benham, at least someone wrote a sound text book at least in part.

      As to the state of play for banks well there was a clear hint on page 9 of the Inflation Report.

      “Market interest rates imply that the ECB main refinancing rate is expected to be
      close to zero in three years’ time”

      Okay so that is the Euro area what about elsewhere?

      “Official policy rates are at historically low levels in most other
      advanced economies. The Reserve Bank of Australia lowered
      its cash rate to 2%. In addition, the Bank of Japan has
      continued with its asset purchase programme, most recently
      amended in October 2014. The programme involves annual
      purchases of ¥80 trillion of government bonds, ¥3 trillion of exchange-traded funds and ¥90 billion of real estate
      investment trusts.”

      Actually it only mentions interest-rate reductions and extra QE which gives a hint. I note that Denmark and Switzerland are missed out presumably because the -0.75% interest-rates do not fit Mark Carney’s “lower bound” of 0.5%!

      All the reality is of interest-rate cuts but all the talk is of rises….

  2. Hi Shaun

    My short answer to your header would be – no!

    As you have commented on the obverse of falling growth and rising employment is a deterioration in productivity and for the BOE to say that they expect productivity to rise in the next x number of years is simply a nugatory statement and they must know full well that they have no real reason for making it. This is a weak economy and getting no stronger.

    I do not think they will raise rates until they are forced to and, if that does indeed happen, the rises will be much faster than they have said. This of course will make the banks obviously insolvent (they are insolvent now by any sensible yardstick of fair value for their assets but this is not blatantly obvious).

    We have puffed up growth figures built on an ever increasing debt mountain (both public and private) and, to my mind, the underlying situation is getting worse and not better. To maintain, or rather pretend, that we can increase interest rates under those conditions shows the BOE up as incompetent con merchants.

    Oh, and of course no one has mentioned that we must be due another recession about now!

    • Hi Bob J

      Actually in a rather extraordinary move Mark Carney claimed in the press conference that the Bank of England was not a player in the UK productivity situation. Perhaps he has forgotten the role of the Financial Planning Committee (FPC) which has pressed the banks to deleverage and thereby contributed to lower productivity in finance. Odd for him to forget as he chairs it…

      Perhaps he is already planning his excuses for the future…

  3. hello shaun

    we as far it goes with employment and the economy

    1, interests will not rise until the USA does , then we’ll not be the only ones in the poo!

    2, employment – – I heard the other day on the radio people talking about their redundacies. although they all seemd upbeat the take away message for me was that they were all poorer , be it self eomplyed , zero contract or full employed

    some were running out of savings and quite frankly sounded too optimistic considering the past record of their job searches

    lots of hope and grime smiles but the question is , is this why unemployment is going down but so is productivity ?

    3, obessions with making sure there’s money to lend but not about actually making people wealthier – well , not for the like of us.

    Shaun why is it so obvious that the top 1% are so much better off but nobody seems to care ?

    Just think of the outcome of that next recessions

    Monty Python’s Flying Circus – “Four Yorkshiremen”
    I was happier then and I had nothin’. We used to live in this tiny old house with great big holes in the roof.
    House! You were lucky to live in a house! We used to live in one room, all twenty-six of us, no furniture, ‘alf the floor was missing, and we were all ‘uddled together in one corner for fear of falling.
    Eh, you were lucky to have a room! We used to have to live in t’ corridor!

    and so on

    looks as if its coming true !


    PS: musinc , ghost town – specials dont fail to miss it !

    • e”mployment – – I heard the other day on the radio people talking about their redundacies. although they all seemd upbeat the take away message for me was that they were all poorer , be it self eomplyed , zero contract or full employed” – Speak for yourself! I’m one of those people, copped a redundancy in 2007 just before the crash and went into self employment the same year (doh!). First 2 years were tough then as the saying goes I never looked back, well, I do with anger at all my time that my useless ex employer wasted, making 2.7 times more now than I did when employed!!

  4. Worth noting that there’s ben a substantial rise in part tiem working alongside a reduction in overtime and bonuses for full time workers

    GDP per capita still tanking with net migration at 300,000 p.a.

  5. “So a downbeat message here ironically very out of kilter with today’s wages numbers.” Not if you consider thewages numbers to be the beginnings of a new inflationary push alongside commodities which now seem to have found a bottom.

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