Why did Mark Carney not talk about an interest-rate rise last night?

Last night saw the Mansion House set-piece speeches by the Chancellor George Osborne and the Governor of the Bank of England Mark Carney. Something was missing which I shall highlight with a quote from last year’s speech by Mark Carney.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect.

There is the obvious point that Governor Carney led the financial markets a not very merry dance last year as they rushed to reassess UK interest-rate prospects after what was considered a broad hint about an interest-rate rise. Not only did it not happen “sooner than markets currently expect” it has not happened at all and the silence on the subject hints that we are further away from it rather than nearer.

In fact there was no mention of monetary policy at all last night which was somewhat odd although a partial explanation might be that the Governor wanted to avoid last year’s debacle. However in my opinion there is more to it than that.

International Developments

I regularly cover the fact that 2015 has been the year of interest-rate cuts rather than rises and just as they were tucking into the main course (canon of lamb aubergine) this happened.

The Reserve Bank (of New Zealand) today reduced the Official Cash Rate (OCR) by 25 basis points to 3.25 percent.

Another theme can into play as an economy “growing at an annual rate around three percent” apparently needs an interest-rate cut. There were times when that was justification for an interest-rate rise. Apparently not any more! Perhaps the shock loss of a one-day cricket match to England came into play and unsettled them. Also this factor seemed to find itself being ignored.

House prices in Auckland continue to increase rapidly

Following on from this the Kiwi dropped like a stone and is 2% down versus the UK Pound £ as I type this.

This morning the Kiwis found a friend in the Pacific as this was announced in South Korea.

The Monetary Policy Committee of the Bank of Korea decided today to lower the Base Rate by 25 basis points from 1.75% to 1.50%.

It may be true that they fear repercussions from the MERS outbreak but the underlying drumbeat here is this in my opinion.

the trends of weakening of certain major country currencies

For South Korea the fall in the value of the Japanese Yen is a very important development as they are close competitors. In effect Japan is sucking demand from South Korea.

So we move on in an environment of interest-rate cuts and I think that puts us in the 50s for such moves in 2015 so far. Rises have only come in response to a currency crisis.

The UK economy

This has shown a few disappointing features recently. The first quarter of 2015 saw economic growth of only 0.3% in 2015 partly driven by the fact that as I discussed on Tuesday our weak trade position sucked some 0.9% out of the economy. Unfortunately the soft spot for the UK economy seems to be continuing.

Industrial Production and Manufacturing

Yesterday’s update was something of a disappointment.

Total production output is estimated to have increased by 0.4% in April 2015 compared with March 2015……Total production output is estimated to have increased by 1.2% in April 2015 compared with April 2014.

So production has so far in 2015 mostly rumbled higher at a rate of just over 1% in annual terms. Even worse this month saw quite a boost from North Sea Oil and Gas of 9.8% which is hardly typical these days and begs a question as to what happens when it declines again.

A driving force of the decline has been a sector which was doing pretty well.

Manufacturing output increased by 0.2% in April 2015 compared with April 2014……Manufacturing output decreased by 0.4% in April 2015 compared with March 2015.

So far in 2015 annual manufacturing output has gone 1.8%,1.2%,1.2% and now 0.2% which is a pretty clear trend. This contrasts quite markedly with the numbers for 2014 which varied between 2.3% and 4.7% and I note that we have yet to get near last year’s worst number.

At such rates of growth it is going to be some time before we get back to the levels these parts of our economy achieved before the credit crunch hit.

In the 3 months to April 2015, production and manufacturing were 9.5% and 4.4% respectively below their figures reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008.

Production is now 14.6% of our economy whereas it used to be manufacturing which was that amount. It feels a bit like secular decline doesn’t it?

GDP Update

The mood music was improved by the latest monthly Gross Domestic Product release from the NIESR (National Institute for Economic and Social Research).

Our monthly estimates of GDP suggest that output grew by 0.6 per cent in the three months ending in May after growth of 0.5 per cent in the three months ending in April 2015.

Interestingly they  are also upbeat for the rest of 2015.

We expect the slight softening of GDP growth experienced in the first quarter of this year to be temporary and forecast the UK economy will expand by 2½ per cent for the year as a whole

It is interesting that the NIESR upgraded its forecast for economic growth in both April and May in response to weak production numbers. They must think that the UK services sector is really pushing forwards.

Monetary policy has tightened

The main player these days is the exchange-rate as in the year since Mark Carney last spoke at Mansion House the UK Pound has strengthened from 87.5 to 91.5 on a trade-weighted basis. Using the Bank of England rule of thumb suggests that this is equivalent to a 1% rise in Base Rates. That provides not a little food for thought when an explicit rise in Base Rates of even 0.25% is often treated with not far off terror.

There has been a little offsetting of this as Gilt yields have fallen but even these have been rising recently in response to moves in Europe. The ten-year yield is back up to 2.15% now. I expect such moves to push fixed-rate mortgages higher if they are sustained.

London House Prices

These seem to have seen a chill wind of change blow through the more upmarket boroughs according to LSL. From the BBC.

The company said that Kensington and Chelsea had seen prices plummet by 16% since a peak in September 2014.

In Westminster it claimed there had been a fall of 22% between a peak in November, and the end of May.


It is instructive I think to compare the latest Mansion House speech with that of last year. It would appear that Bank Rate rises are no longer something to broadcast as we did not even get a “few and gradual” type exposition as Governor Carney looks to move the debate onto pastures new. Perhaps also he was distracted by the scandal that has sprung up in Canada over the issue of art purchases. However the mood music at the Bank of England over Bank Rate increases has changed it would appear and I note that so many of its peers seem to think that it is time for interest-rate cuts including countries with a better economic growth trajectory than the UK. So we are left wondering if Governor Carney will confirm his reputation shown below.

‘Cause he’s a dedicated follower of fashion.
He’s a dedicated follower of fashion.
He’s a dedicated follower of fashion.

As to his “ethical crisis” campaign I hope that we will see jail terms for bankers who behave really badly and welcome the tenet of his argument whilst noting that it is a little odd he has taken 2 years to spot it. However noting that Yes Prime Minister has returned to our screens it would be remiss of me not to point out that it would suggest such a campaign really means that the Bank of England thinks the banking scandals are over. Another failure for Forward Guidance in the making?


17 thoughts on “Why did Mark Carney not talk about an interest-rate rise last night?

  1. Hi Shaun

    I suspect that Carney, like many of his confreres, is realising that he is beginning to look a bit stupid always making empty pronouncements on IRs. Yellen is the same in the US and the parsing of every utterance has become almost comical and she is becoming increasingly discredited. The problem is of course they like to be perceived as being in control and, if they are considered to be empty poseurs, they will lose credibility quickly, and thereby control. In fact, as you say, the mood music in the bond market appears to be changing and it is this that will ultimately determine what happens to IRs, not the empty words of the central bankers.

    As regards the “ethical crisis” I’m sure most would agree that it is only natural justice for the bankers to receive some sort of come uppance but it is as well to remember that it is the system itself which allows them to get away with these shenanigans and this is where we have only half hearted reforms which are totally inadequate at the end of the day.

    • Hi BobJ

      You are right that it has become something of a circus with people trying to double-guess the Fed and the Bank of England. What is lacking is any actual policy action as it remains either just around the corner or sometimes a fair way away.

      Whilst I welcome any reforms it is 7 years into the credit crunch and for many of the crimes it is a case of closing the stable door after the horse has bolted. Let us hope that we will put in place some proper laws and reforms.

  2. Shaun, I have an image of central bankers sitting in an office with a map of the world with the interest rate of each country on it on a flag and then a big wall chart of all of the important exchange rates. They all nervously pace around and watch what each other is doing and then cut or hold their interest rate to maintain a competitive advantage. There has been a race to the bottom. Well now they are there – what are they going to do next? And more importantly what are they going to do when there is a problem? There race to the bottom has probably caused the next crisis- a nice big asset bubble that will take only a small problem to burst and then what? Can’t cut interest rates. Already done QE and haven’t wound it back. I would have thought that restoring a degree of normality should be top of the agenda at the next G7 or Davos and a globally sincronised interest rate rise programme put in place.

      • Hi Pavlaki

        If the Bank of England or the US Fed have a world map of interest-rate changes they will note that 2015 has seen loads (50+) of cuts but very few rises. Serbia added itself to the list of cutters later on today. On and on it goes with quite a few places pushing their currency lower too as you say.

        From the beginnings of this blog I pointed out that the central banks had no exit strategy and in fact they plunged in ever deeper,but now even they are wondering about your question

        And more importantly what are they going to do when there is a problem?

        QE to the max I would guess…

  3. Hi Shaun
    The books (gdp) will continue to be cooked until
    it all goes pop.

    A song for Carney from Shaun

    Fool said I, you do not know, silence, like a cancer, grows
    Hear my words and I might teach you,take my arms and I
    might reach you.But my words like silent raindrops fell,
    and echoed in the wells of silence.


    • Hi JRH

      The GDP issue is becoming ever more serious. Central banks themselves do not take much notice of it these days as we see countries with strong economic growth cutting interest-rates. Forbin’s suggestion that 2% GDP growth is the new 0% has a point.

      Being a Paul Simon fan I did get it “silence, like a cancer, grows” and will reply with what is as good an opening lyric as I can think of..

      “Hello darkness, my old friend,
      I’ve come to talk with you again,”

  4. We are actually getting further away from an interest rate rise, and will continue to do so as long as we tread this path: everything subordinated to the repair of banks’ balance sheets.
    Wouldn’t like to be a mortgage paying owner-occupier then…

    • IMHO don’t look at what the UK wants to do. We already know the UK wants to print and print forever. Look at what the US wants to do. If they raise rates the UK is in trouble.

    • Hi Benifitzg

      I agree that considering the better yield (2.85%) one might have expected a better result. But with the changes to annuties and the way that the UK DMO has kept issuing more and more of these I wonder if they have used up demand for now.

      Also it may be the best yield for 9 months or so but once inflation begins again in the UK 2.85% will look a bit thin to say the least. I would much rather issue it than buy it wouldn’t you?

  5. Good stuff Shaun,
    So – harsh penalties for Bankers who get us into a mess, but, so far, no harsh penalties for Bankers who fail to get us out of a mess …. maybe next year.

  6. Great blog, Shaun, as usual. Regarding “the scandal that has sprung up in Canada regarding art purchases”, an old November 2012 interview with then Bank of Canada Governor Carney on Power & Politics. the show hosted by Evan Solomon, who allegedly picked up at least $2,250 in commissions on art purchases made by Carney, is most illuminating:
    After minute eight, Governor Carney gives Mr. Solomon a new polymer Canadian $20 bill:
    Evan Solomon: I don’t get to keep this, I assume?
    Governor Carney: It depends what questions you ask after this. It’s called payola, Evan.
    Evan Solomon is alleged to have picked up at least $2,250 in commissions on art purchases made by Carney, as he asked the central banker soft-ball questions on the TV and radio, and gushed about what a “hot commodity” he was. It seems he understood the concept of payola very well.

  7. “it has not happened at all and the silence on the subject hints that we are further away from it rather than nearer.” The market appears to disagree with you as you pointed out yesterday and today in your references to bond yields???

    “It is interesting that the NIESR upgraded its forecast for economic growth in both April and May in response to weak production numbers. They must think that the UK services sector is really pushing forwards.” It’s called narrow money growth, check it out, for once the NIESR are likely to be right although 2.5% pa growth is ambitious. I expect circa 2%.

    I would suggest Shaun that we are seeing the beginnings of “normalisation” i.e. a return to what I used to consider “normal” prior to 2008. Rising yields/falling bond prices poor cover on new issues of what are currently considered high rates – think about it, even cash deposit rates are rising. Bond and Equity markets are at long last beginning to decouple which imo is a good thing. Inflation is already here if we exclude imports, the US is doing well and will raise rates in September/October at which point I expect the UK will be forced to respond by early 2016 although imo the UK should have already increased. The threat is from the exchange rate, if the £ falls quickly we’re stuffed with high inflation which will of course destroy my prediction of2% GDP for this year.

  8. Shaun,

    Do people running the BoE and Govt no longer consider it dangerous to allow dangerous bubbles to appear in house prices?
    Can this really go on like this??


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