Mark Carney is the very model of a modern central banker

Yesterday at 4 pm the Governor of the Bank of England spoke to the nation. I have to confess that before the event I wondered why? He had already made his post Brexit referendum statement where he had performed well and said the right things.  At a time of crisis the central bank should do as he did and confirm it will supply liquidity and continue to perform its duties. It was only yesterday that the issue of bank funding costs was raised in the comments section so this move was sensible.

As a further precaution, reflecting the possibility that heightened uncertainty may last a while longer, today the Bank of England is announcing that it will continue to offer Indexed Long-Term Repo operations on a weekly basis until end-September 2016. This will provide additional flexibility in the Bank’s provision of liquidity insurance over the coming months.

So in looser language it is willing to splash the cash in liquidity terms for three months and this should help to keep the UK financial system from any danger of  freezing up. This adds to the back-stop he put in place with his first speech.

And as a backstop, in order to support market functioning, the Bank of England continues to stand ready to provide more than £250bn of additional funds through its normal facilities.

I also have some sympathy with him on this front.

In Tim Geithner’s famous dictum, “plan beats no plan.”

As currently he is dealing with a UK political establishment which is in flux represented by a combination of hiding,backstabbing, denial and disarray. So far so good for Governor Carney.

The model of a modern central banker

These days they respond to events with ever lower interest-rates and extraordinary monetary policies and we got a hint with a large pointed arrow on it from Governor Carney.

the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.

This was immediately translated as being a signal for a lower Bank Rate and additional Quantitative Easing to the £375 billion stock that the Bank of England currently holds. Before I say what I think he will do I would like to show the financial market reaction to it.

UK Markets

There were two very strong market moves in response to the speech. The first fits in with one of the themes of this blog which is the worldwide push to lower interest-rates and yields. Mark Carney’s words lit the blue touch-paper as UK Gilt prices rose like a rocket. There are reports that the UK 2 year yield went negative briefly which would be the first sighting of such a thing in the UK I can recall. I wonder if that is a misprint but the surge saw our 10 year Gilt yield fall to 0.8% this morning and the 30 year to 1.7%.

The UK FTSE 100 surged also and ended the day above 6500 where it remains. So it is higher than before the Brexit result due to two main factors. The first is due to the lower UK Pound £ as so many of the companies have foreign earnings. The second is the fall in yields above which make any reliable dividend stream look increasingly attractive. As Governor Carney had met the banks the day before an awkward possible “early wire” perspective is provided as the FTSE 100 rallied over 200 points that day in what was then a surprising move. A little care is needed as outside the top 100 the performance is weaker shown by the fact that the FTSE All Share is up only 1% since the pre Brexit close.

By contrast the move in the UK Pound £ was relatively sedate. Yes it fell but then it rallied again as knee-jerk responses met the view that this was what most people expected him to want to do. So the UK Pound fell by around 1%.

Will this help?

In theory yes but then we hit the issue of the fact that the Japanese and European experience has been patchy at best. Yes the Euro area has been putting in a better performance in 2016 but much of that in my view is due to lower oil prices and inflation leading to higher real wages. However if we return to the central banking play book the higher equity prices will stimulate the economy via wealth effects and the lower bond yields will make more economic activity viable.

If that was a magic wand we would not be where we are would we? Also whilst the central bankers may claim that people can borrow cheaply we cannot be sure that the funds will go to the right places. After all the much trumpeted Funding for Lending Scheme (FLS) which started 4 years ago can be measured by the large number of times official sources use the word “counterfactual” in response to it.

On that subject I expect the FLS to be fired up and boosted again probably sooner rather than later.

Forward Guidance

This is where life gets a lot more awkward for Mark Carney as his Forward Guidance predicted higher interest-rates and the UK moving towards a Bank Rate of 2.5% or so. The road to this was signposted at the Mansion House speech just over 2 years ago.

It could happen sooner than markets currently expect.

That was a clear hint to which financial markets responded. There are costs to that but even if that does not bother you much what about those with mortgages and businesses who locked in borrowings to take advantage of interest-rates which he was telling them were good? Instead they have been left far behind as mortgage rates have plunged.

In reality Forward Guidance Mark 20 is for Bank Rate cuts presumably to 0% which I note is at the time horizon of policy action ( around 2 years) during which no interest -rate rises took place and Mark Carney never even voted for one.

Mandate

This was another awkward bit for Mark Carney yesterday so let is consider his mission statement.

Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability.

Now let us see how that fits with these words.

Uncertainty over the pace, breadth and scale of these changes could weigh on our economic prospects for some time……economic post-traumatic stress’

You might have thought with his and the Bank of England’s dreadful forecasting record he might have shown some discretion. After all claiming certainty of a sort is what got him into his Forward Guidance mess. Also a central bank should act to reduce issue around uncertainty and not feed it whatever the Governor’s own personal views.

Comment

It was hard not to have a wry smile at the Governor of the Bank of England hinting at something that I have predicted for so long which is a Bank Rate cut! Let me be clear that down at these levels such moves have so many unintended consequences they may even be contractionary in my opinion. Also there is the issue that whilst he tried to say he was giving his own opinion Mark Carney was in effect tying the hands of his Monetary Policy Committee colleagues behind their backs.

In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.

Yes you were pre-judging them Mark because you had told us this.

As required by our remit, the MPC identified that the most significant risks to its forecast concerned the referendum.15 This was the view of all nine independent members of the MPC.

I would not be pleased if I was one of the other eight. A better approach would have been to call an emergency meeting and actually vote. This way around all we have are more Open Mouth Operations as we wonder how many of them are in fact Carney’s cronies. The more I am officially told that someone is “independent” the more I wonder about the reverse.

As to analysis there was this from Kristin Forbes back in October 2014.

Over periods longer than one quarter, however, a stronger real exchange rate is correlated with a significant fall in total exports……..a 10% appreciation of sterling – holding all else equal – is predicted to cause a 3.1% fall in export volumes over the long term.

In conclusion she told us this.

I discussed how sterling’s strength has created some drag on the trade balance, and thereby aggregate demand, growth, and employment.

Now currently we have pretty much the reverse due to sterling’s fall. I would be thinking of that right now.

Also there is fiscal policy when you can borrow for a long time very cheaply. There are possibilities there which did not exist before. Back on June 10th I discussed the issue here as the perspective on fiscal policy has shifted considerably with Gilt yields where they are. I have sympathy with Governor Carney in the sense that there is no one in authority to discuss this with but going forwards it is an option and of course his promised interest-rate cuts would only really work in say 18 months time so too late for any immediate issues.

But let me leave you with my song for Mark Carney with thanks to the Kinks.

And when he does his little rounds
‘Round the boutiques of London Town
Eagerly pursuing all the latest fads and trends
‘Cause he’s a dedicated follower of fashion

On The Radio

I will be on Share Radio ( which is on UK DAB plus the internet) from 1 pm to 1:30 pm today and it is a sign of the times I was on the Morning Money show as well earlier.

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31 thoughts on “Mark Carney is the very model of a modern central banker

  1. Hi Shaun

    What MC is doing is what you might expect a central banker to do in the circumstances: reduce rates.

    But your narrative assumes he is still in control. You have pointed out here on numerous occasions that inflation in services is robust and that the oil price effect will fade and inflation will go up, or rather was due to go up anyway. The fall in sterling is going to push that even more such that we might see a very sharp rise in inflation in the next year, especially if the pound falls further, which I suspect will be the case. He will do his “looking through” act at first but what if inflation still keeps on going up; can he do this forever? I doubt it.

    Furthermore the BOP deficit is already huge and will those sell offs of UK assets evaporate now in the light of Brexit uncertainty and make an even bigger hole? It is distinctly possible.

    It is far from fantasy therefore to envisage both a very sharp rise in inflation and a much worse BOP position even than the current situation. What will he then do in the face of what might well be a sterling crisis? It may well be force majeure and he will have to hike borrowing costs, like it or not.

    If this happens then the whole structure will collapse and MC, along with a lot of other people is, to use the vernacular, toast.

    Carney’s words are only chapter 1; there are a few more to go before this story is finished.

    • Hi Bob J

      Yes services inflation has run at 2%+ through this episode and is about to be joined by a shift higher in imported goods prices due to the lower UK Pound £. How this plays out I do not know. I thought the UK Pound £ would settle around US $1.35 in the post Brexit world but of course that did not allow for the way that our political establishment has collapsed.

      As to the Balance of Payments much is in play. We should be more competitive which did work post 1992 but worked very little post 2007/08. But yes we are in chapter 1.

  2. I am the very model of a modern governor general,
    I’ve heard information anecdotal and stochastichal
    I know Mervyn King of England, and inflation rates historical
    From RPI to CPI, in that I’m categorical;
    I’m not well acquainted with matters economical,
    No idea of theorems, both Keynesian nor Kahnemanical
    About forward guidance I’m teeming with a lot o’ news,
    With many cheerful facts about interest rates, they’re gonna move

    Sorry Shaun best I could do in five minutes!

  3. I see GO has now abandoned his plan to return to surplus by 2020. I am shocked; I never thought this would be possible!

    • he’s been moving the goal post every year since he’s been in office .

      brexit gives him the excuse he needed .

      if we’d voted to stay in he’d have to find a suitable excuse

      Forbin

    • Sounds like blackmail, Anteos, – like GO’s threat to cut billions in an emergency budget if the vote went the wrong way.

      That’s the problem dealing with blackmailers – you can’t trust anything they say.

  4. I never thought that Duisenberg (first ECB president) would be challenged for the title of the ‘worst central banker ever’ but Carney is surely a contender after yesterday. Carney did make a strong initial challenge, with his early speeches that were straight from Duisenberg’s play book – hint’s that rates will be up\down next thrown in at at random whenever he gave a speech; he did however seem to improve after a year or so and had become much more consistent. Aside from the small matter of the forward guidance of course. Talking down the economy, yesterday, however raised his game to a whole new level. He could have given a confidence boosting speech – the weakness of the pound is a massive opportunity for the economy, there may be some (much needed) short term boost to inflation, but just as when we left the ERM, this is an opportunity for our exporters, we will do everything we can to help them etc…But instead he tries to create the ‘DIY’ recession that his best mate, Osborne so desperately needs to save face.

    We need a Governor and for that matter a Chancellor that are not tainted by ‘Project Fear’ to guide the economy through this short term uncertainty; until Adam Smith’s ‘invisible hand’ works it’s magic as the dead hand of the EU is removed from the UK economy. They should both take a long hard look at Cameron’s resignation speech and follow suit!

    • Hi Mike and welcome to the comments section

      It is a while since I have seen a mention of “Dim Wim”! Many peoples economic history only goes back to ECB President Trichet. My criticism of Carney from Thursday was that he ignored his own mission statement to promote the monetary and financial stability of the UK to doom monger and to say I told you so.

      In fact all Governors of the Bank of England seem to end up saying the same things as he sounded so like Baron King! Who back in the day was accused of being a doom monger. Plus ca change etc…..

  5. Great blog as always, Shaun.
    I noticed the first chart in Carney’s speech shows geopolitical risk from 1985 forward, with important events that caused it to spike being highlighted. The first such event is labelled “TWA/Air India hijackings” for June 1985. A TWA airliner was hijacked by Islamist terrorists that month, and one US Navy diver was murdered but that was the only fatality. The Air India flight referenced was not hijacked; it was blown up with the loss of all 329 people on board; most of the passengers were Canadian citizens. I have no idea which outrage had a bigger influence on perceptions of geopolitical risk. The perpetrators of the Air India bombing were Sikh nationalists operating in Canada, and terrorism by Sikh nationalists has certainly not emerged as a global threat in the three decades following to the same extent as radical Islam. However, this was the Canadian 9/11; the TWA hijacking wasn’t anything like so devastating. It seems strange that a Canadian Governor of the Bank of England would have let that stand. Why wasn’t it labelled “TWA/Air India outrages”?
    Anyway, Happy Canada Day!

    • Hi Andrew and thanks

      Firstly apologies for missing Happy Canada Day, I did remember later and posted in on Twitter. Thanks for the reminder about the charts and I have been just rechecking them. His third chart about economic policy uncertainty in the UK seems all wrong to me. In 2007/08 it must have been at a peak after the collapse of Northern Rock and then Lehman Brothers and yet apparently it is only half of what it is now. Come on Mark!

      For those reading this here is a link

      http://www.bankofengland.co.uk/publications/Documents/speeches/2016/speech915.pdf

      • But in 2007/8, they thought they knew what they were doing – 8/9 years later, they know their remedies have not worked and have created a storm, which they may not be able to print their way through. Hence they have gone from Belinda Calisle: “Tell me, what can I do?” to a full-blown (yes, you’ve guessed) Steve Priest!

  6. Hi Shaun
    I’m glad that you are becoming
    more in demand with the media.
    My wife and I both feel that MC
    and GO appear to be going out of their way
    to make things worse, whatever their agenda
    is I hope it doesn’t work.

    JRH

  7. In addition to nominating Steve Priest for Governor (again!), it seems something from Simple Minds/Alive and Kicking seems appropriate:

    “What you gonna do when things go wrong?
    What you gonna do when it all cracks up?
    What you gonna do when the Love burns down?
    What you gonna do when the flames go up?
    Who is gonna come and turn the tide?
    What’s it gonna take to make a dream survive?
    Who’s got the touch to calm the storm inside?
    Who’s gonna save you?”

    Answer: Pump money in,watch house prices go right up and the Daily Mail can kid everyone it is all fine. It is 8 years since Lehman’s crashed – after Black Wednesday, that would take us to 2001 (Blair’s second eelction)!

  8. When people say the government can borrow money cheaply I guess they’re referring primarily to turning over current debt rather then new investment. In the UK, governments use a range of cunning schemes to ensure investment projects are funded through the private sector at significantly higher rates than they would incur raising similar sums on the money markets.
    Of course if they’d like to spend the next few years doing this via one or more of the companies holding my pension funds then I’m all for it !

  9. if it wasnt for political dogma they’d use the cheapest source of finance to build their way out of
    recession

    and wasnt inflation the plan ? until it happens of course – and from now on all economic ills are the fault of the British public for voting the wrong way……

    Gotta laff , haven’t you ?

    Forbin

    PS: perhaps now we can convict the thieves who started the banking crisis in 2008 like Iceland did.

  10. Shaun, thought you might like this!

    The Yes Minister take on the referendum:

    So, let me get this straight… the leader of the opposition campaigned to stay but secretly wanted to leave, so his party held a non-binding vote to shame him into resigning so someone else could lead the campaign to ignore the result of the non-binding referendum which many people now think was just angry people trying to shame politicians into seeing they’d all done nothing to help them.

    Meanwhile, the man who campaigned to leave because he hoped losing would help him win the leadership of his party, accidentally won and ruined any chance of leading because the man who thought he couldn’t lose, did – but resigned before actually doing the thing the vote had been about. The man who’d always thought he’d lead next, campaigned so badly that everyone thought he was lying when he said the economy would crash – and he was, but it did, but he’s not resigned, but, like the man who lost and the man who won, also now can’t become leader. Which means the woman who quietly campaigned to stay but always said she wanted to leave is likely to become leader instead.

    Which means she holds the same view as the leader of the opposition but for opposite reasons, but her party’s view of this view is the opposite of the opposition’s. And the opposition aren’t yet opposing anything because the leader isn’t listening to his party, who aren’t listening to the country, who aren’t listening to experts or possibly paying that much attention at all. However, none of their opponents actually want to be the one to do the thing that the vote was about, so there’s not yet anything actually on the table to oppose anyway. And if no one ever does do the thing that most people asked them to do, it will be undemocratic and if any one ever does do it, it will be awful.

    Clear?

    • amazingly still upto date series still on political power …

      1/3 of the public according to a recent opinion poll think we will not go through with the leave . ……..

      good show this , have some more popcorn

      Forbin

    • Can’t do the style, but can add: The man, who started it and won will now find his career ended by winning it as someone who lost, wins and who joined him, have enhanced their own positions by disowning him, prompting the man, who started it in the name of democracy to press for the only man democratically elected for his view to be removed by an undemocratic body following the views of the man, who was not elected democratically 8 times.

      (Garage is directing UKIP’s governing body to sack Carswell on Monday).

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