Last night the Governor of the Bank of England Mark Carney was kind enough to confirm one of the central themes of this blog so let us investigate what he said. In an apparent attempt to deflect criticism he titled it “The turn of the year” and posed this question.
why not the start of normalisation of monetary policy?
This is something he has headed in the direction of before. Back in July at a celebration of the anniversary of Magna Carta he told us this.
In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.
For newer readers this is where the “turn of the year” phrase came from and was a hint about interest-rate rises especially when combined with this.
I expect that this will involve raising Bank Rate over the next three years from its current all-time low of ½ per cent.
This was presented as a clear steer and of course backs up this from the Mansion House speech of June 2014 when we were told this about a Bank Rate increase.
It could happen sooner than markets currently expect.
In the esoteric world of central banking speak this was taken by financial markets as a clear steer that an interest-rate rise was around the corner. So you can see that Governor Carney has built up quite a track record of promises on the interest-rate increase front and that we have reached his latest timing promise assuming he uses the Christian calendar. Or if you like the timing threshold for his Forward Guidance.
So what did he say then?
Here is the crucial phrase.
Well the year has turned, and, in my view, the decision proved straightforward: now is not yet the time to raise interest rates. This wasn’t a surprise to market participants or the wider public.
I have highlighted the last bit because these are weasel words from the Governor as markets adjusted to his promise back then by heading in the direction of a Bank Rate rise but they were not surprised yesterday as it had become obvious that he was singing along to Kylie Minogue.
I’m spinning around
Move out of my way
Putting that into numbers and I am converting them for ease of understanding the December 2017 future in essence forecast an interest-rate of 2% after Mark Carney’s hints in July and now it is 1.05%.Oh and those who has remortgaged on the back of his Forward Guidance what are they supposed to do now? So clear losses and in some cases large ones for those who have taken him at his word.
This point is rammed home by this piece of research from Markit Economics today.
This trend was mirrored when the period was extended to six months, with 40% anticipating tighter monetary policy (the highest percentage since September).
It seems that the UK equivalent of Joe Sixpack still expects a Bank Rate rise after Governor Carney’s past promises.
What is his reasoning?
Since monetary policy operates with a lag, it must be forward looking.
Okay fair enough but as he is the person who has made timing promises this next bit is both awkward and frankly embarrassing.
As a result, monetary policy will continue to depend on economic prospects not the calendar.
We get various statements about matters which were mostly also true last July but the crux in my opinion is another confirmation of what has been argued here.
After gaining momentum in 2013 and peaking around 3% in 2014, output growth has been steady during 2015, at rates close to 2%, a little below pre-crisis norms.
If we wish to get a little more technical then the sentence below is perhaps the most damning for the Forward Guidance of Governor Carney.
the slowdown in wage growth gives pause to the inference that the labour market is as tight as would be suggested by the drop in unemployment alone.
Remember when he used a 7% unemployment rate as a threshold for Forward Guidance Mark One? Well we are on Forward Guidance Mark Eleven or so now as it proves to be as slippery as an eel but we can take a look at the latest data on the subject above which is the labour market.
Today’s data
There is good news here although of course for Mark Carney there is the problem of comparing the unemployment rate below with his 7% and then 6.5% thresholds!
The unemployment rate was 5.1%, lower than for a year earlier (5.8%). It has not been lower since August to October 2005.
If you had followed the logic of the original Forward Guidance then you might have expected to see Bank Rate at say 2% now rather than remaining at the emergency level. Although of course emergency as a concept does not fit well with this.
The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.0%, the highest since comparable records began in 1971.
The numbers above are good news for the UK but not for the theories of the Bank of England. One of my central themes since I began blogging was that output gap style theories have failed. The Bank of England under Mervyn King failed in this regard and the Mark Carney innovation of applying the same theory to a different market – the labour market – has if anything failed even more spectacularly and however much he tries to hide it we are reminded of the lyrics of Dead or Alive.
You spin me right round, baby
Right round like a record, baby
Right round round round
The bottom line here has become wage growth which is of course another intellectual defeat for the Governor as he switches from a quantity measure to a quality one. On that front then his output gap theory has imploded with the numbers below.
Average weekly earnings for employees in Great Britain increased by 2.0% including bonuses and by 1.9% excluding bonuses compared with a year earlier.
Actually the 3 months to November have gone 2.1%,1.9% and 2% giving some apparent stability and losing the 3%+ of late summer. If we switch to the Bank of England Agents we see them strumming a similar tune.
The softening in pay growth had reflected slowing activity in manufacturing and the effects of low inflation, which was mitigating upward pressures in pay for some companies.
Comment
If we play nicely then we can call Mark Carney a man of intellectual flexibility and perhaps a fan of Alice In Wonderland too.
It’s no use going back to yesterday, because I was a different person then
Indeed that is not the only quote from that famous book that is applicable although the use of the one below is subject to the critique “only six?”
Why, sometimes I’ve believed as many as six impossible things before breakfast.
Still back in the day we did get a hint about measuring time.
Alice:How long is forever? White Rabbit:Sometimes, just one second.
But as we observe that we still have an emergency Bank Rate of 0.5% and more QE (Quantitative Easing) will be rolled over this month to keep it at £375 billion and Mark Carney’s Open Mouth Operations are now designed to push the UK Pound £ lower then what is the difference between him and his predecessor? Will his head open in the style of the film Total Recall to reveal Mervyn King underneath? Perhaps he has spotted the rewards from such a policy.
Mervyn Allister King, Baron King of Lothbury, KG GBE FBA
One difference so far is that Governor Carney has not been a fan of more QE but of course as Alice In Wonderland reminds us that could change in a second. After all he is a dedicated follower of fashion and perhaps it will be in fashion at Davos this week.
Notayesmanseconomics's Blog 
Hi Shaun,
If we play nicely then we might suggest that Mr Carney now realizes, or perhaps always knew, that the headline unemployment figure has been dragged as low as possible without mention of the wider (U6?) under-employment position, and that the quantity of new jobs has abjectly failed to make up for the quality of those jobs lost.
“The softening in pay growth” : that doesn’t sound too bad if you say it quickly enough, and don’t think about it for too long.
There’s double the amount of people on minimum wage as fifteen years ago.It’s now around 1 in 20 workers and forecast to grow to 1 in 9 by 2020.I wouldn’t disagree.
A lot of people are now in work to do the 16 hours and get tax credits.
As you allude Jim,the official distortions are huge.
When I read these average wage figures I’m sure they’re using mean averages not median.Maybe Shaun could shed some light?
Hi Dutch,
“A lot of people are now in work to do the 16 hours and get tax credits.”
I believe that is particularly applicable to the newly self-employed. The choice seems to be to either declare oneself unemployed and go through the hassle of claiming JSA, or choose to declare oneself self-employed and continue to claim in-work tax credits. Under these circumstances it’s little wonder that the numbers of self-employed is at a record level.
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‘The choice seems to be to either declare oneself unemployed and go through the hassle of claiming JSA, or choose to declare oneself self-employed and continue to claim in-work tax credits.’
I think you’ve nailed it there Jim.4.6 million is an incredible number.
http://www.theguardian.com/uk-news/2014/aug/20/self-employment-uk-highest-level
‘Of the 1.1 million increase in the total number of workers in the UK between the first quarter of 2008 and the second quarter of 2014, 732,000, or just over two-thirds, were self-employed.’
Two thirds?????? Yep,some recovery that.No wonder there’sno wage growth.
Hi Dutch
Yes averages not medians as shown below.
“monthly estimates of the level of average weekly earnings per employee.”
Hi Shaun
One thing that strikes me about this is that unemployment is a (fairly severe)lagging indicator. If you take this as an important indicator (which MC has done), together with the desire to target inflation two years ahead as a guide to fixing IRs, it seems to me that the issue is not about the actual level of unemployment being ignored but rather whether it has any relevance at all. At the very least as a tool of policy it seems to have considerable disadvantages.
The conclusion one takes from all this is that the facts do not matter. This is not so much a matter of “intellectual flexibility” as the need to rationalize away uncomfortable truths. Certainly Mark Carney is keen to maintain his credibility but in this respect I’m afraid that will have to go down alongside his ever lengthening list of failures.
Also worth pointing out Bob,that we’re funding many jobs with fiscal deficits.
I remember when 7% unemployment was a criteria for hiking….
Such innocent days.
Keep up the good work, Shaun, there’s so much control of any analytic language in the MSM now it’s always refreshing to read you calling it true. The base question for me has always been: how can this be a recovery if we have emergency level rates? I’d like to see a comparison on degree-typical starting salaries in London from ten years ago to now – going on anecdotals, people aren’t really earning much more than they were a decade ago and much of their free income will be snatched by increased housing costs. Demand seems to be slipping all about. So many cons and schemes have been rolled out to feed us the money to keep buying things – Help to Buy, the new purchase model of monthly payments for flash cars – rather than bite the bullet of an ugly crash. It’s left manufacturing is in catastrophic flux, rabbit in the headlights of the new tech players with their massive cash piles, global reach and disinterest in old business models. Do kids now even want to buy/own cars? Carney might well finish his term before we see rates shift up.
Hi Peter and thank you
Looking forwards it seems that the future involves a lot more renting than owning as you imply and that will cover cars, homes and most things. It poses a few questions although of course it was a model in the past. I remember my grandparents and parents doing that for TVs and Video Recorders which for younger readers were the things which preceded hard drives, I-player et al.
If we are as well off as we are told then why for example did I get a student grant back in the poorer days but students now have to borrow? Why does Battersea Park Library close in the middle of the week? That is before we get to the issue of the price of property especially in London. There have been large mostly paper gains for property owners but at the price of placing an ever large debt burden around the necks of new buyers. Debt is the new four letter word.
Interviewr: Mr Carney , what is your role at the BoE ?
Carney : well to put it in layman’s language its to fill my boots with gold and bu@@er off before I get found out
Interviewr: don’t you think the people will object ?
Carney : not the people who matter don’t , I’m just copyinh them !
Forbin
You’re such a cynic Forbin,but the evidence is pretty compelling.
Watching Brown/darling head for jobs in the City pretty much sums up the last fifteen years of monetary policy.Obviously,the banks concerned have to remunerate them adequately for their ‘talent’.
£375bn QE
FLS
HTB 1
HTB 2
Fiscal deficits 5%+
and we’ve got record numbers of people heading for minimum wage,unable to afford a roof over their head.
Something, somewhere,went very wrong.For all the money he’s on,Carney should be able to tell us.
Hi Dutch
Don’t forget that we do not count the self employed ( 4.62 million and rising) for the wages numbers. They seem likely to be a downwards influence if counted.
In the terms of Sir Humphrey Appleby then Mark Carney is paid to avoid telling us such realities. Remember an honest and intelligent Governor of the Bank of England is considered an innovation by HM Treasury.
Hi Shaun.
It could be that Mr C. will return to Canada ( carrying loads-a-money) without ever seeing a change to the base rate. Those who think that Zirp/QE and saving the TBTF banks will result in a lost decade or two might not be wrong. Indeed, the economy looks like it’s operating under Chapter 11 protection.
Hi Eric
On his original plan to remain for 5 years rather than the usual 7 year term for a Governor he would already be well on his way! Although there remains the possibility of a cut to Bank Rate. I thought that he planned an international job such as replacing Christine Lagarde at the IMF but that may have faded, hence his new found interest in staying on.
Another great post Shaun.
We know they cannot afford interest rates to rise the national debt has risen 50% in 5 years.
They are only postponing the inevitable world debt increased by $57 trillion between 207-2014.
Debt is growing wages are falling money supply is expanding exponentially as more and more debt is issued.
There is a worldwide glut of oil and steel ,the Baltic Dry Index is at record lows and the HARPEX also demonstrates falling world trade.
This will end very badly the only question is how long before the inevitable happens.
Hi Private Fraser and thank you
I note that the Bank of England has stopped telling us that private debt is falling which feeds into your point. China looks rather like us capitalist imperialists as we moved towards 2007/08, what could go wrong?
If any personnel department (sorry, ‘HR’ ) were to interview this chap, I hope that they would never have taken him on and if they did, would have vetoed any promotion whatsoever. We deserve to go down the pan. I remember real interviews at Cambridge.
Hi Rowland
Remember the Sir Frank Gordon line from Yes Prime Minister about an honest and intelligent Governor of the Bank of England? “Although an innovation it should certainly be tried….”
“So clear losses and in some cases large ones for those who have taken him at his word” – Depends if mortgage rates move substantially lower. I believe they will in fact start moving in the opposite direction later this year regardless of base rate and gilt moves.