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.
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.
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.