Mark Carney continues his Open Mouth Operations..

Yesterday saw an outbreak of what we have come to call Open Mouth Operations as Bank of England Governor Mark Carney gave testimony to the House of Lords. There were fears of something of an early wire as a couple of hours beforehand the UK Pound £ took quite a dive. It quickly fell to US $1.21 leading Katie Martin of the Financial Times to report this.

“There are no natural buyers on any dip.” Fun times. The most fun.

So the price fell to zero or there were only unnatural buyers whatever they are! Perhaps it was just nervousness about what he might say. Although for some it was an apparent triumph for Governor Carney when the currency rebounded later. From Noreena Hertz of ITV.

Market responding positively to Mark Carney’s calm & sure demeanour. Pound recovering (slightly) during his Committee appearance.

That seemed to miss that he was the likeliest cause of the drop.

What did he say?

Here is his opening salvo from the Guardian.

He says monetary policy has been overburdened, it is the principal if not sole vehicle to provide stimulus to the UK. He welcomes the government is signalling a resetting of the balance between monetary, fiscal and structural policy.

This is yet another U-Turn from the man who denied that monetary policy was “maxxed-out” and it ignores the fact that UK austerity has in fact only seem lower fiscal deficits and not an end to them as seen for example in Germany. So in fact there has been fiscal stimulus in the UK on that definition so he was playing very fast and loose there. What he is arguing for is more fiscal stimulus which calls into question the effectiveness of the monetary policies he has implemented.

Also if monetary policy is overburdened well by cutting Bank Rate to 0.25%, introducing an extra £60 billion of QE (Quantitative Easing) as well as starting a Corporate Bond QE program he is responsible for overburdening it! Especially as he did so during a period of sustained currency weakness.

Next up was the issue of QE and the fact that it helps the already wealthy and does little for the less well-off. From the Guardian.

Carney says since QE, jobs have been created, GDP has grown. That is not due to QE, but the stance has helped the UK economy during a difficult period.

Different groups will benefit in different ways. Between 2009 and 2016, most have benefited, although some more than others.

In fact he was allowed to get away with an entirely unsubstantiated claim that QE  was responsible for nearly 3 million new jobs. The subject is something of a hot potato since Prime Minister May criticised the way that QE had affected the economy. This led naturally to something which will send a chill up the spine of savers.

He says he has sympathy with savers, but says the Bank’s focus is on its remit to get inflation where it needs to be.

Again it was sad that he was not pressed on this point as of course he has admitted that inflation will overshoot the target and that he is “comfortable” with that. This will at a time of near zero deposit rates hit savers and the Bank of England has recently started a new program called the Term Funding Scheme to keep deposit savings rates low. This is because cheap funding as now available from the Bank of England should they require it which means that they are under less pressure to get deposit funding.

The next issue was also awkward for a man who offered Forward Guidance that a rise in interest-rates could come sooner than markets expect and then did nothing. Of course later on he cut them casting adrift businesses and people with mortgages who had followed his advice.

Baroness Wheatcroft question: On the prime minister’s comments, she said monetary policy was an effective emergency measure and a change has to come. Does that mean monetary policy?

That area was quickly shuffled over as of course after 7 years of being on an emergency setting monetary policy was not tightened as promised it was eased even further.

Late on the consequences of QE were raised and the response was simply to claim it was all allowed for.

On side effects, we are mindful of side effects. We did look at impacts on pension funds, insurance companies, margins and profitablity of banks and building societies, to satisfy ourselves sum of side effects did not outweigh positives. Case was strong so we pursued it.

So there Ivory Tower told them that it would be okay. It of course could not possibly know where financial markets would go to and definitely could not know how businesses would respond. Actually the rise in pension deficits exceeded the amount of QE as the UK Gilt market soared although less so since it retraced some of the gains.

The Pound

This was perhaps the most extraordinary of Governor Carney’s claims so let us return to the Guardian.

Carney says there were four elements to August’s package, sterling barely moved, the market understood what we were doing.

This really takes the biscuit as of course some of the fall in the UK Pound £ was due to the fact that the next day after the EU leave vote Mark Carney spoke at the Bank of England and hinted at more monetary easing! For those who missed the hint he was more direct on the 30th of June.

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.

So the Pound had already fallen when the announcement was made something he is able to recognise when somebody else speaks.

The 6.5% movement in currency since the Conservative party conference has largely been driven by a single factor, not monetary policy.

Mark Carney’s Tenure

This is an issue mostly of his own making as he asked for a five-year term as opposed to the usual eight years when he took the job. Here again his Forward Guidance was found wanting as he now seems to want to stay the eight years. Why? Well Justin Trudeau seems to have ended the possibility of him leading the government of Canada and 2021 would coincide with the end of the term of Christine Lagarde at the IMF.

The Financial Times reviewed it thus.

Bank of England governor Mark Carney chuckled when asked at a House of Lords committee whether he intends to remain in his post for his full eight-year term, replying that his decision, which is due by Christmas, will be “entirely personal”.

The Bank of England puts it like this.

Mr Carney has indicated that he would serve to 30 June 2018.

Lately he has come under some fire from politicians who disagree with his policies and if the media is accurate he has been given a vote of confidence by the Prime Minister. Is she a football fan as they know what that often means?


There is more than a few issues here as Mark Carney tries to rewrite history. Perhaps nobody has told him that history is usually written by the victors. This was the crux of his case yesterday according to the Guardian.

Should we raise rates in August and get it to 2%, at the cost of jobs and income in the economy. Or is it wiser to look through that exchange rate move and help economy adjust. In the view of every member, it was the right course of action to provide stimulus at that point. ( the 2% refers to the inflation target)

He has shuffled the debate to an interest-rate increase and thereby created something of a straw(wo)man because he could have made no policy move and let things develop. In my opinion the UK would be in better economic shape now if he and his colleagues had taken that course. As we stand the fall in the UK Pound is equivalent to a 3.25% Bank Rate cut or a bazooka compared to his pea shooter.

On the other side of the ledger his moves on the day after the vote to ensure financial stability were an example of how a central banker should behave. There is some truth in the fact that he was the only part of the UK establishment at work that day.



15 thoughts on “Mark Carney continues his Open Mouth Operations..

  1. Great blog, Shaun, as usual.
    I never thought I would say this, but I am actually starting to miss Mark Carney at the Bank of Canada. When Carney negotiated the 2011 renewal of the inflation-control agreement he had been tasked with an ambitious research agenda to transform inflation targeting at our central bank. In the end, about all he did was replace all references to “inflation targeting” with “flexible inflation targeting”. He later bragged to the UK Treasury Select Committee reviewing his suitability to be Governor of the Bank of England about what a splendid achievement this was.
    However, at least he understood the doctor’s maxim: “Above all, do no harm”. He left the favoured core inflation measure, CPIX, exactly as it was, not even deigning to make the trivial reform that would remove mortgage interest cost related to secondary accommodation from that series. I was furious at the time, but at least he didn’t pluto it. Now Governor Poloz, with the consent of Finance Minister Bill Morneau, on track to be Canada’s worst Finance Minister ever, have replaced the CPIX with three measures, none of which exclude mortgage interest or changes in mortgage rates, as the CPIX did. The background information for the renewal agreement shows a chart (Table 5-B) for nine foreign central banks to try to convey the message that the dysfunctional change that they are making pretty much conforms to best international practice. But only one of those central banks, Sweden’s, includes a mortgage interest component in its target inflation indicator, and their core inflation measures exclude changes in mortgage interest rates. The next time that Poloz cuts the overnight rate to drive the loonie down and inflation up, it will tend to drive these core measures down, not up, by the impact on mortgage rates.

    • Hi Andrew and thanks

      The moves you describe happened in the UK in 2008/09 when the Bank of England slashed Bank Rate to 0.5%. The main RPI measure went negative ( this was mostly forgotten in the more recent deflation scare I looked at yesterday) due to the impact of the cuts to mortgage rates. The irony is I think that this worried the Bank of England in spite of the fact that they had caused it.

  2. I suspect Carney won’t get the extension to 8 years. He is Osborne’s man and I think the last rate cut annoyed May as it was unnecessary along with the talk about a further cut. Carney refuses to admit that his policies are partially responsible for the massive fall in the pound or that he might have hurt savers.
    There will be the normal ‘leaving for personal reasons’ and the ‘very sorry to see him go’ from both sides but I can’t see him staying on.

  3. I’d want to ask whether Tata Steel’s Port Talbot shutdown is due to pension fund costs. If ultra-low interest rates can be linked to pension fund costs which cause the shutdown of a steel plant -> then we’d have a smoking gun showing that ZIRP hurts the real economy.

    • Hi ExpatInBG

      Thats an interesting point. The underlying business model has improved. From the BBC.

      “Losses at Port Talbot have been reduced by a turnaround plan and better market conditions such as rising steel prices and a drop in the pound’s value.”

      It would indeed be an irony if the policies of Mark Carney and the Bank of England offset that…

  4. un-natural buyers. Do they mean high frequency scalpers using an obscure trading option which prevents them from trading but allows them to jump the queue when a real market participant trades ?

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