A not so Super Thursday for Mark Carney and the Bank of England

Today is Super Thursday in the UK where the Bank of England not only makes its policy announcement and releases the meeting minutes but also we get the Quarterly Inflation Report. The latter may well go some way to justifying the “Super” moniker as the continuation of 7 years of an emergency Bank Rate of 0.5% plainly does not! There will be changes to the Inflation Report as the Bank of England shuffles its feet looks embarrassed and announces its economic forecasts in the manner of Phil Collins.

Or did I miss again
I think I missed again oh
Or did I miss again
I think I missed again oh

If we go back to the Inflation Report of 2015 there was this from Governor Mark Carney.

That a gently rising path of Bank Rate delivers inflation to the target reflects the underlying dynamics of the economy.

Er what rising path of Bank Rate Mark? Those who followed his Forward Guidance and remortgaged are likely to want to use much sterner language. Why? Well look at this quote from Twitter yesterday.

@GabrielSterne Markets pricing in a 25% prob that next UK rate change is down.

Up is indeed the new down for interest-rates may rise “sooner than markets expect” (June 2014) and “around the turn of the year” (September 2015) anti-seer Mark Carney. Does it bother him?

Absolutely not. I have No regrets.

If we return to the subject of inflation then it was forecast to be accelerating upwards right now on its way to the 2% per annum target by the summer as opposed to being zero. The continuing falls in oil and commodity prices have torpedoed such a forecast and this does matter because monetary policy is set a fair way ahead.

It takes time for monetary policy to affect the economy – its peak effect is generally estimated between 18 and 24 months

This is a big issue that those who advocate very activist monetary policy close their eyes too as by the time it impacts it is as likely to be heading in the wrong direction as the right one.

This was illustrated at the last Inflation Report press conference by Ed Conway of Sky News.

Governor, five years ago in the Inflation Report, markets were expecting rates to be about 3.75% now. About a year ago the Inflation Report was – looking at market forecasts – saying that the rate was going to be about 1% now, little bit below 1%. All the time the markets have been forecasting that rates are going to be going up at some point about a year hence or a little bit more. Do you – are you really sure this time around that it’s even worth endorsing those forecasts, given how many times they’ve been wrong in the past?

Ah 3.75% to 1% and now the grim reality that it remains at an emergency 0.5%. Could it have been more wrong? Still if I may be permitted to blow my own trumpet readers here have been much better prepared. From December 2013.

So should we see any slowing of the UK economy in 2014 and the exchange rate of the pound continues to be strong there are factors pointing towards a base rate cut.

As I pointed out earlier markets have come round to that way of thinking that rises are a mirage so what about a cut?

The International Environment

This has changed considerably too as events have unfolded. If we look to the Far East it was only on Friday that we saw the Bank of Japan overcome its aversion to negative interest-rates. Except in a familiar theme of the times the half-life of such moves is getting ever shorter. If you think that this was a move in the Currency Wars then the Yen has regained all its losses and is at 117.6 versus the US Dollar as I type this. The response is yet more rhetoric and Open Mouth Operations.

‏@fxmacro Kuroda Ally Says BOJ Has No Rate Limit, May Cut to Negative 1%

If we switch to Europe the Euro has rallied to 1.116 versus the US Dollar when Mario Draghi and the European Central Bank are spending 60 billion Euro’s a month on QE to drive it lower. Using the Draghi Rule the rise in the Euro in 2016 so far is equivalent to a 0.5% increase in interest-rates. This leads to speculation as shown below.

@fwred My concern right now: with this kind of market reaction to Draghi, and Buba’s QE hate, the ECB might favour a larger rate cut.

Just to be clear that is for a larger cut than to the -0.5% now expected.

What about the United States and the promised 3-5 interest-rate rises in 2016? Sober Look takes up the story for us.

Thus we see that 3-5 seems to have morphed into a big fat zero as we discover a numerical addition to my financial lexicon for these times.

In short the international environment has shifted away from interest-rate rises in the United States and towards more interest-rate cuts in the Euro area and Japan. Or as Tom Petty so eloquently put it.

And I’m free, free fallin’
Yeah I’m free, free fallin’
Free fallin’, now I’m free fallin’, now I’m
Free fallin’, now I’m free fallin’,


The UK Pound £

It has already been a year of two halves for the UK Pound £. I wrote and the beginning of the year  that I expected a drop and as it swept lower from US $1.48 to US $1.42 it backed that up. But the last couple of days or so it has regained strength -although much of this is US Dollar weakness as prospects there change- and is now above US $1.46. I guess a lot of people got short at US $1.42. Putting it another way the rally over the past few days is equivalent to a 0.25% increase in Bank Rate but since the last Inflation Report more like a 1% cut!

Bond Yields

UK Gilt or bond yields are also not what you might expect from a country where an interest-rate rise is continually promised. The ten-year Gilt yield is a mere 1.58% and in a subject I will return to in a minute the five-year yield has fallen to 0.9%.

Mortgage Rates

The five-year Gilt yield rose to over 2.1% after Mark Carney hinted at higher UK interest-rates in the summer of 2014 and to 1.4% in late autumn last year. As this is something of a benchmark for fixed-rate mortgages we can see that he has given people exactly the wrong advice!

Putting that into numbers the Bank of England calculated the new mortgage rate back in June 2014 as 3.15% and it is now.

the new secured loan rate was unchanged at 2.55%.

So 0.6% lower not higher as Forward Guidance is laid bare and down is the new up. I doubt there will be a protest group of those who remortgaged on his advice today at the Bank of England but maybe there should be.


The mainstream media honeymoon for Mark Carney is definitely over with even the BBC producing this today.

The governor of the Bank of England has been “too aggressive” in suggesting interest rates may rise

It is a shame they are using a fund manager with an obvious vested interest and moral hazard problem as an authority but perhaps we should not be too churlish. However what does this mean for monetary policy? In reality less than you might think as it has been my opinion for a while that on any economic dip the Bank of England would ease again. What has changed is the international environment where other central banks are engaging in a race to the bottom on interest-rates which is like the Supermassive Black Hole that Muse sung about.

Meanwhile if you look there are signs of both institutionalised and general inflation in today’s news alone if you bother to look.

Energy industry regulator Ofgem is to examine a claim that charity Age UK has been promoting unfavourable gas and electricity deals in return for cash.

The charity sector in the UK is having a dreadful run which is sad news but does offer the opportunity for reform and improvement. Meanwhile in a house near you…

Halifax: House prices increased by 1.7% between December and January……Prices in the three months to January were 9.7% higher than in the same three months a year earlier.

Or for Londoners from City-AM

House prices have broached the £500,000 barrier across 51 per cent of London postcode districts, new research has found – backing up evidence the capital’s homes are becoming increasingly unaffordable.

The report, by estate agent Stirling Ackroyd, found even areas such as Peckham, which were traditionally seen as pretty affordable, have now joined the half-a-million club, with average house prices of £503,000.

Meanwhile away from the spotlight there has been another £4.2 billion of Operation Twist style QE this week.






14 thoughts on “A not so Super Thursday for Mark Carney and the Bank of England

  1. Hi Shaun, The BBC have also said today that any ‘shock’ in rates is more likely to be on the downside – the probability implied on the markets of a rise this year is tiny at 7.5% but the probability of a cut stands at 40%. Clearly, the Governor’s record of prediction is raising widespread concern. I predict any proclamation about rates from here on will be treated with extreme scepticism, so much so, as to have no value. Interesting to see what he does from here. Will he officially abandon the forward guidance policy?

    • Hi Zummerzetman

      Your reply notes a change in financial markets as yesterday’s 25% chance of a Bank Rate cut has become 40%! On that regard there has been the weakness of the US Dollar which has seen the UK € rise to US $1.46 and Mark Carney stating that the lower bound for UK Bank Rate is below 0.5%.

      On the latter point he was a mass of contradictions as it was he who said the lower bound was 0.5% and also if rates are going up why bother with it? The bombast and waffle in defence of Forward Guidance was embarrassing.

  2. Great article Shaun. Once again well done for calling it right.

    Finally the proles have realised the Emperor has no clothes…..

    • Hi Anteos and thank you.

      Do you think that the message is now reaching a wider audience? There have been signs of it in what I do but that is a specific audience albeit one which can spread the news. Perhaps those with mortgages will notice it in their wallets and purses…

  3. I’m spewing with rage for a variety of reasons.

    Not least that we pay this clown so much money.

    How do they get away with it?He’s been there since Nov 2012 and done what??????

    His only response to the depression that he and his minions have helped cause,is
    1) to suggest cutting rates again-well,last time worked out so well,why not-
    2) to suggest asset purchases-well it worked out so well last time,we haven’t bought them back.

    Hattip HPC
    ‘Mr Carney said: “The Committee could also decide to extend the Asset Purchase Facility or to cut Bank Rate further towards zero from its current level of 0.5%.”‘

    • Hi Dutch

      Mark Carney covered quite a few different positions in the press conference yesterday as was summarised by his view on inflation which might be “higher…..or lower”! This was also his interest-rate position where his “we are going to raise” mantra was repeated but as you say he also said that he could cut below the current 0.5% which contradicted his past lower bound statements as well as returning us to a “higher or lower” message. So overall not very impressive.

  4. What really gets me is that when the currency crisis finally materializes(which obviously,no central bankers will see coming),many people will be maxed up to the gills in cheap debt sold to them with false promises.

    Whilst I agree that individuals are free to choose to get into debt,I think it’s disingenuous in the extreme to create a situation where you’re encouraging people into it by distorting risk pricing the way they have.

    Rant over.

    • Absolutely. Over the last few years I’ve noticed several blog commentators have made the strong point that breaking the link between risk and the price of money will have disastrous consequences. The consequences seem to be in two camps. The first camp says there will ultimately be another Lehmans style moment. The second camp says there will be an extended (30 years) period of very low growth. Either way, after 7 years, ZIRP doesn’t look like a solution to any of our economic problems.

  5. Great column as usual, Shaun.
    I had previously groused in your part of the blogosphere about how inferior the filming of the Bank of Canada’s press conferences at the time of a Monetary Policy Report release as compared to the Bank of England’s press conferences at the time of an Inflation Report release, blaming the Bank of Canada for keeping the camera glued to the Governor and Deputy Governor at all times. David Aikin, one of the best Canadian parliamentary reporters, recently set me straight on this matter: “Yup, that was me putting a question to Poloz but no need to criticize the BoC on the press conference videography. The National Press Theatre, where that press conference was held, is ‘our house’, that is, it is controlled by the Parliamentary Press Gallery. The video angles you see are chosen by individual news organizations. The ‘pool’ shot always stays on whoever is giving the press conference and almost never focuses on the interlocutor. “ I apologize for previously misrepresenting the situation out of ignorance.
    Whoever is to blame, the Bank of Canada videos are definitely an inferior product to their Bank of England counterparts. I find the audio is also inferior, with the questions from reporters sometimes inaudible. I imagine it is because they didn’t speak into the microphone as they were supposed to. You can’t find what was actually said because there are never any published transcripts, as there are for the Bank of England press conferences.

    • Hi Andrew

      It is a shame that the Bank of Canada press conferences are not of a higher standard. Actually Mark Carney tries his best to deflect attention and hence the cameras from himself! That is of course a sign of trouble.

  6. Hi Shaun
    A late ‘entry’ from the US.
    It would be a mistake to think the FED did anything other than for and because of the US Banks ( and to a lesser extent the US economy). It does not ‘do’ interest rate policy for the benefit of the ‘over-seas dollar club of nations’ or the rest of the world. There were some ‘soggy’ indicators at the end of last year, but quite a few folk over here think that may be short-term. They may be right or wrong. But if there is the slightest justification in the next months for rises then the FED will surely increase rates.

    • Actually JW I think you’re wrong here as Yellen did cite “international developments ” as the reason for not hiking in September. That was just a cover of course but, then again, everything is!

    • I agree with Bob J, and, yourself re “for the banks” but would also cite insurance companies with all those pension liabilities that will be gradually coming to fruition over the next 10 – 30 years. I think the Fed is taking long term view on those liabilities and trying to get the rest of the World used to the idea of higher rates to help pension schemes, otherwise, there will be a lot more busts in the next 30 years only the Insurance companies this time with maybe the banks as well.

      Re “soggy indicators” they’ve been there since last summer and given other cycles I expect to come into play this year I fear those who think such indicators short term are wrong. I don’t expect any further rises from the Fed this year and maybe a cut as, unlike the other CB’s they still operate a modicum of economic analysis of evidence and facts alongside the use of some logic and common sense when implementing policy.

      I have no pleasure in saying this as I did have substantial US investments but have trimmed back significantly since early December as I firmly believe the US economy is in for a tough year in 2016.

      Oh, and re the oil price – I believe I owe you a digested hat!!

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