Mark Carney prepares the ground for a UK Bank Rate cut

Yesterday was rather a significant day for the Bank of England although the so-called “Super Thursday” was in terms of actual action yet another damp squib.

at its meeting on 11 May, the MPC voted unanimously to maintain Bank Rate at 0.5% and to maintain the stock of purchased assets, financed by the issuance of central bank reserves, at £375 billion.

Only in terms of the “masterly inaction” so beloved of Sir Humphrey Appleby was that a Super Thursday. However there was a reminder of why back in Canada there was a campaign as shown below.

Mark Carney for Liberal Leader.

He was criticised for interfering in politics and as the party he would have led surged from third place to win the next election he showed an early sign of his Forward Guidance by instead opting for the Bank of England.

This brings us to yesterday which became – especially in the press conference – a one subject day as the consequences of Brexit ( the UK leaving the European Union) were debated. Those on the remain side will have cheered his claims whilst the leave camp will be disappointed and point out that the claims he does the wishes of George Osborne have another tick in the box. Perhaps this section of the remit is currently applying.

Subject to that, the MPC is also required to support the Government’s economic policy,

As ever let me avoid the politicking but point out that the UK establishment is solidly in one camp and the rhetoric from Martin Sanbu in the Financial Times is bizarre.

But the BoE uniquely combines the authority of a venerable government institution with a well-deserved reputation for independence and competence.

Forward Guidance on interest-rates? The “rebalancing” of Mervyn King? What of course we are seeing is one section of the UK establishment doffing its cap towards another.

Scaremongering from Governor Carney

There was a fair bit of this on display yesterday.

the EU referendum has begun to weigh on activity…… Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. At the same time, supply growth is likely to be lower over the forecast period, reflecting slower capital accumulation and the need to reallocate resources. …… This combination of influences on demand, supply and the exchange rate could lead to a materially lower path for growth

At one point he went even further. From BBC News.

“could possibly include a technical recession”.

Here has invented his own term as we wonder exactly how this differs from a recession?! Perhaps he thought he would look clever. However in ordinary circumstances the establishment would round on someone saying this accusing them of “negativity” and “talking the economy down”.

Forecasting failures

If we look back to the policy horizon or when the Bank of England was setting monetary policy for now we go back to May 2014. What was happening then? Well Mark Carney was under fire on the subject of Forward Guidance. He had more to say on the subject that day.

the economy has edged closer to the point at which Bank Rate will need gradually to rise.

I will let him off the way that oil price forecasts and hence domestic energy costs barked up the wrong tree but economic growth or GDP forecasts are material. We were told that annual economic growth would now be 3% and rising or pretty much flat out. One section of the forecast had it edging towards 6%! That does matter because you see where we are is in the equivalent bottom zone to that if we note the update from the NIESR ( National Institute for Economic and Social Research) from Tuesday.

Our monthly estimates of GDP suggest that output grew by 0.3 per cent in the three months ending in April 2016 after growth of 0.4 per cent in the three months ending in March 2016.

The latest business surveys have us dropping out of the fan chart altogether.

The PMI surveys are collectively indicating a near stalling of economic growth, down from 0.4% in the first quarter to just 0.1% in April.

These have been reinforced by this mornings official construction numbers.

In March 2016, output in the construction industry was estimated to have decreased by 3.6% compared with February 2016……….In Quarter 1 (Jan to Mar) 2016, output in the construction industry was estimated to have decreased by 1.1% compared with Quarter 4 (Oct to Dec) 2015.

I have regularly reported on the many troubles in the official UK construction data but they come on the back of poor production and manufacturing numbers. Indeed looked at alone they have fallen into a recession as output has fallen in two quarter for both.

So both Forward Guidance for an interest-rate rise and forecasting have been their usual failures. Thus Governor Carney was probably relieved to use a possible Brexit as a scapegoat as after all the weather has been pleasant recently and the winter was mild.

Monetary Policy

There will be more than a few minds on the Monetary Policy Committee mulling this statement.

In the United Kingdom, activity growth slowed in Q1 and a further deceleration is expected in Q2

After all the “output gap” they tell us so much about has just got wider. Let me just be clear that the output gap has failed as a predictive tool but the official reply to this is to sing along with Shania Twain.

That don’t impress me much

Oh and if the surveys and data shown above are any guide then this was guilty of understatement.

Growth over the forecast horizon is expected to be slightly weaker than in the February projection.

Reading those excerpts you may be surprised by this conclusion.

the MPC judges that it is more likely than not that Bank Rate will need to be higher by the end of the forecast period than at present to ensure inflation returns to the target in a sustainable manner.

Please do not misunderstand me that are valid grounds in terms of inflation targeting for such thoughts but this is a body which ignored consumer inflation rising about 5% per annum in the autumn of 2011 and it is now less than one tenth of that. Whereas government economic policy needs some “supporting” right now.


Governor Carney must be pleased that he has been able to open the door to an easing of UK monetary policy and a possible Bank Rate cut with so little response. After all it would be a catastrophic failure for his policy of Forward Guidance should Mark 19 be completely the opposite of its predecessors. Thus he must have been delighted to be able to travel in a smokescreen provided by the heat and light ( admittedly very little light) of the Brexit debate.

In an ordinary meeting he would have had to face even more questions about his own competence and abilities as well as his period of tenure as Governor. Oh and you know my view on official denials and forecasts…

IMF’s Lagarde: UK Interest Rates Could Rise Sharply If UK Leaves EU (@livesquawk)

You might have thought our valiant anti-corruption crusader might have been quiet as reminders circulate of her own corruption trial! But I guess she too is grateful for the distraction provided. As to her role as an economic seer well you merely need to look up both her and the IMF’s record on Greece. Her fellow travellers at the Financial Times may have to forget what they wrote in 2014 though.

 IMF getting it wrong again and again


Meanwhile I note this rather extraordinary statement from Andy Haldane the Bank of England’s Chief Economist in a speech in Edinburgh yesterday.

Each comprises internal and external members, individually accountable and drawn from diverse backgrounds.

That is the MPC,FPC and others. Really? Anyway they diversely voted 9-0 again.



17 thoughts on “Mark Carney prepares the ground for a UK Bank Rate cut

  1. Great blog as usual, Shaun.
    Mark Carney had a terrible record for political interference when he was Governor of the Bank of Canada, so I didn’t expect things to be any different when he moved to the UK.
    Look at the 2014 book “Common Ground”, billed as Justin Trudeau’s autobiography, but actually written by Jonathan “I am not a conservative, but I used to stand in for one on a CBC radio political panel” Kay of the National Post. On p. 251, one reads about why the Liberals should not merge with the NDP: “it serves nobody to suggest that Western Canada’s resource wealth is a ‘Dutch disease’ that has weighed down the rest of the economy.” His name isn’t mentioned, but Dutch disease was almost the signature issue of Tom Mulcair, the Leader of the Opposition and NDP leader. This passage in the book stands out because it is desperately thin on policy discussion.
    On September 7, 2012, Mark Carney made a “Dutch Disease” speech in Calgary, like Justin Trudeau attacking Mulcair’s ideas without mentioning him by name. It was clear that after spending a summer vacation at the Nova Scotia home of Scott Bison, then the Liberal Party Finance critic, Governor Carney had turned himself into a Liberal Party of Canada attack dog. The road to power for the LPC lay less through taking votes from the governing Conservative Party than from the Opposition NDP, and that was what he was bent on doing.
    At the press conference where the October 2012 Monetary Policy Report was released, dominated as usual by Carney groupies, only David Akin of SunMedia connected the dots between Governor Carney’s Dutch disease speech and his summer vacation. Governor Carney not only saw nothing improper in his vacation, he refused to say if that was the first time he had vacationed at Mr. Bison’s place or at the home of another Liberal member, saying that was his own personal business.
    An October 2012 paper “The Dutch Disease and the Canadian Economy” by Professor Serge Coulombe of the University of Ottawa and colleagues Boadway and Tremblay stated: “We set aside the environmental dimension to resource exploitation in this paper, not because it is unimportant but because it would take us too far afield.” Carney could easily have made a similar statement in his original Dutch Disease address, in his response to David at the October 2012 press conference or on other occasions, but he never did so. So far from demolishing Mr. Mulcair as many of the accounts of his speech and later remarks said, he simply ignored Mr. Mulcair’s essential argument. Tom Mulcair was understandably furious.
    Professor Coulombe, one of Canada’s leading energy economists, and a man who should know Dutch disease when he sees it, estimated with colleagues Beine and Bos that 200,000 manufacturing jobs in Canada were lost between 2002 and 2008 due to Dutch disease. Although his Dutch Disease speech contained a comparison of the share of manufacturing employment in total employment between the US and Canada from 1976 to 2011, Carney never disputed this finding; he didn’t even mention it. And he wouldn’t have had much authority if he had tried; he is an old Goldman Sachs man, not an energy economist.

      • Yes, absolutely he did. Here is a link to the speech for you and anyone else who is interested.
        Here is a link to an interview with David Akin the following month. David brings the speech up and asks if it isn’t an attack on Tom Mulcair. Governor Carney denies, unconvincingly, that it isn’t. Notice that he is given another chance to say that part of the Dutch disease argument maintains that oil production should be taxed more because of concerns about global warming, which would imply lower oil production, a lower exchange rate and all the things that flow from that. His speech didn’t deal with that, because that was a political debate he couldn’t get involved in. Instead, although he denied Opposition Leader Mulcair was his target, he still left Canadians with the idea that he had provided a stunning putdown of Mulcair, when he had completely ignored his main point.:
        It’s a little ironic considering the way he now wears his climate-change-angst on his sleeve.
        The Coyne reference is a little obscure. James Coyne was the only Governor of the Bank of Canada to be forced out of office, in 1961, when he disagreed with PM John Diefenbaker over economic policy. His successor, Louis Rasminsky, would only take the job on the condition that the Bank Act be rewritten to clarify the relationships between Bank officials and the federal government. Those changes are best known for reinforcing central bank independence but also required Bank officials to stay out of politics. The thrust of David’s question, which Governor Carney chose to ignore, was obviously that in his Dutch Disease speech and his comments around it he was violating the Bank Act.
        And here is a link to the video of the release of the October 2012 Monetary Policy Report that contains the exchange with David Akin that I mentioned:
        Very sorry that I can’t just send you a transcript of the press conference, as the Bank of Canada doesn’t provide one. We’re not as advanced over here as you are in the UK.

  2. Sean, I watched the press conference yesterday after the presentation of the Inflation Report. I thought the UK press corps let the British public down in a sense by just adopting the MPC’s framework, and making it all about Brexit. The National Statistician had just announced on March 9, consistent with the advice of the advisory stakeholder and technical panels, that he wanted to make the CPIH the headline inflation measure and to add a council tax component to it. It was pretty clear that this would logically lead to this oddball measure becoming the BoE’s target inflation indicator. This would close the door on incorporating housing prices in the target inflation indicator, the direction in which the European Central Bank is headed, and desired by many Britons for its own sake.
    I thought that Larry Elliott of the Guardian might ask about this, but his question was about the impact of Brexit on the pound sterling. He was given an opportunity after the first round of questions to ask a second question, but he didn’t do so. Neither did any other journalist ask about the target inflation indicator. I suspect the MPC will put the CPIH back in its Inflation Report once it is redesignated as a National Statistic, without making much of a fuss about it, and then wait on the Chancellor of the Exchequer to change the BoE’s remit to make it the target inflation indicator. The quarterly OOH(NA) series will continue to be ignored. The MPC really don’t want a national debate on whether the CPIH is “in line with international best practice and current statistical thinking on the measurement of price change” as the advisory committees hilariously maintained. It is a debate that they would be bound to lose.

    • Hi Andrew

      I agree completely that the UK press corps pressed for Brexit clickbait and missed chances to ask questions about the UK economic slow down and the inflation infrastructure. In other news I note that the Guardian has hit trouble ( in spite of having a wealth fund) and that poses a real question for journalism over here. This is because whilst it has many faults it is one of the few media organisations that still follow a “broadsheet” style and approach left.

  3. Hello Shaun

    oh come on , the only time we’ll get a rate cut is if the UK votes to stay in the EU – then we’ll have the euro imposed on us within 6 months

    mark my words !

    also heard this one ??

    “The International Monetary Fund chief has said a vote by the UK to leave the European Union would have “pretty bad, to very, very bad” consequences. ”

    maybe she meant for the EU and not the UK ? political interference by the head of a QUANGO – who keeps getting things wrong !


    • Hi Forbin

      Perhaps Christine Lagarde meant that the consequences would be bad for her! Anyway you might think she would be busy with what is happening in Greece as I note that GDP fell by 0.4% again in the first quarter of this year.

      As to the fall in GDP predicted well at the extreme the IMF claims it would be worse than the credit crunch. Of course the real credit crunch it failed to predict…

  4. Lagarde says very bad cosequences, but they claimed Greece would have a recovery by now and that Greek default would be disasterous.

    Now let’s fact check this. Iceland has a recovery, Greece does not. Avoiding Greek default has been awful for Greek citizens and European taxpayers.

    I suggest that Lagarde’s disaster is only bad for banksters, French banks, agricultural subsidy sucking French landowning parasites and Eurocrats. If Lagarde says Brexit is a disaster then I’d better vote for it

    • Hi ExpatInBG

      I am sure you are not alone in such thoughts. The media loves to proclaim the views of such establishments in the headlines but if it points out the litany of errors it is on page 19.

  5. Hi Shaun and thanks for another week of interesting blogs.
    I never thought that a budget speech by the chancellor George Osborne and a BOE report by Mark Carney would be so dominated by a plea for the public not to vote for Brexit.
    So many voices painting a picture of utter disaster and possibly war if we vote to leave Europe makes me wonder why David Cameron instigated a vote at all in the first place.
    If after the vote and the UEFA Europe both candidates for blame if the economy flatlines during the summer a rate cut is very possible and stagflation will be the buzz word.
    However,the MPC forecasts 2.07% inflation by mid 2018 ( I was also amused) and interest rates will have to rise.I wonder.

    • Hi Midge and thanks

      Back in the May 2014 there was a mention in the press conference of the market assuming 2.38% interest-rates in the UK going forwards. As you know I have argued that they wont raise them and note that we are still at 0.5%. So if we get weakness my logic goes….

      As to the referendum it was supposed to be in 2017 wasn’t it? There must have been some reason for them to think they could win it going early. The rise of the establishment chorus that you mention means that it is far from going to plan

  6. “Mark Carney prepares the ground for a UK Bank Rate cut”

    I don’t think he is Shaun. He’s just towing the party line (in true “independent” style”) on “Remaining”. As you quote :

    “the MPC judges that it is more likely than not that Bank Rate will need to be higher by the end of the forecast period than at present to ensure inflation returns to the target in a sustainable manner.”

    Personally, my predictions for the UK this year, assuming a “remain” vote were:

    1. Q1 – falling growth – Check
    2. Q2 – sideways growth – kind of check
    3. Q3 & Q4 – increasing growth to around 2% by year end – we’ll see

    If Brexit occurs all bets are off and I expect growth of less than 1% and maybe zero.

    Returning to the subject, I think you have put words into Carney’s mouth that he never uttered or suggested. We are in disagreement on this subject and I give you my notayesman to yours….

    • I suspect brexit would have little economic effect – the eurozone won’t permit it’s trade surplus with the UK to be threatened. There is no currency change – sterling will continue to float against the euro.

      And as to growth, I don’t see any real growth – only growing obfusication of growth statistics …..

      • Agreed about”growth” , when I use the word I mean as reflected by the establishment.

        As to Brexit, there will be panic if the vote is to “leave” with investors (such as myself) holding back to see what happens next whilst companies will do the same putting capital investment and expansion plans on hold as we all nervously await developments. The aggregate effect will be to reduce “growth” to 1% as calculated by the authorities or less.

        Not sure on currency, if foreign investors get scared and sell off there will be a significant devaluation providing the BOE with all the inflation they want (although their favourite core inflation measure wouldn’t be affected much by the currency devaluation)

        Longer term, I fear there will be a political element at play. It’s late at night here so correct me if I’m wrong but I believe that if the UK leaves the EU it will be the first country ever to do so.

        IMO other EU and EZ countries will watch the UK’s “progress” closely, therefore, it will be in the Franco/German interest to ensure failure of the UK’s experiment. Success would run the risk of other disaffected countries (Greece, Spain, Portugal, Italy et al) leaving too with the resulting rise in the Euro spelling disaster for the remaining countries, especially Germany.

        The EZ could sit back and more or less allow the current Status Quo of trade agreements to continue, thereby protecting their surplus in the short term but running the long term risk outlined above.

        In the event of Brexit EU politicians will be carefully considering the lesser of these 2 evils. They are nowhere near as stupid as UK politicians and the decision to make will be clear to them…….

        • Economically, the UK debt to GDP ratio and deficit matter more than EU membership, especially given that the UK does not have a surplus with the EU ….

          The real BRexit issues are political. Khodorkovsky and Obama have made their opinions known. I respect these 2, unlike Lagarde, Trichet, Juncker, Sarkozy, Merkel and other partners in the crimes of Euro treaty violation and Greek lenders rescue.

          The issue of euro currency integrity comes down to politics. The euro will be strong for as long as it is backed by the Bundesbank & German economy. Should a political event in Germany threaten that backing -> money markets will become very volatile. Maybe some are afraid that BRexit may trigger political unstability in other EU countries.

          Without a political crisis – BRexit will be an economic damp squib

      • I think we disagree. If foreign investors take fright in the event of Brexit (which they might) there will be no damp squib about a hard currency crash.

        I AM one of those investors who have a negative view of Brexit and WILL act accordingly. There are many others like me.

        Loss of trade agreements and imposition of tariffs will decimate exports and exacerbate an already precarious balance of payments, in turn creating an increase in unemployment, thence an increase in deficit, thence an increase in debt and finally, about 3 – 5 years down the road (after the 2 year breather where the UK would still enjoy free trade with the EZ) a very bad debt to GDP ratio.

        We can agree that part of it will be created by politicians as it is they whom will dictate trade agreements.

        I sincerely hope Brexit doesn’t come to pass, as it will give me no pleasure referring to this exchange of views in 5 – 7 years time saying “I told you so”.

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