Mark Carney needs to explain why he eased policy in a currency decline

Today is another not quite Super Thursday where the Bank of England takes centre stage and publishes the quarterly Inflation Report as well as its policy announcement and meeting minutes. However the Super Thursday moniker has been grabbed early by the Central Bank of Egypt which has become the doppelganger of the “masterly inaction” so beloved of the apochryphal civil servant Sir Humphrey Appleby. It’s website is struggling so let us use Bloomberg.

Policy makers set a tentative exchange rate of 13 pounds per dollar, plus or minus 10 percent, until it holds an auction at 1 p.m. local time. The currency will float freely after the sale, according to two bankers familiar with the decision.

Just to give you a guide the official rate was 8.9 earlier this week. What is it about currencies called the pound these days?! Mark Carney will already be very jealous of a currency fall which may not be over if the black market rates of 18 earlier this week are any guide. But there was something to give Governor Carney sleepless nights.

which included raising its two benchmark overnight interest rates by 3 percentage points.

The stock market loves it and is up by 8% this morning ( Governor Carney is interested) but bond yields are somewhere between 16% and 20% ( we just lost him).

Forward Guidance

There has been a lot of this from the Bank of England. This is from the August meeting.

  If the incoming data prove broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.

This has turned out to be an example of one form of forward guidance (about the economy) toppling another type of forward guidance on interest-rates or as Ben Broadbent said early last month.

It’s also that many economic indicators are in general very noisy, even at the best of times.

Ben weasels for a while but then gets to it.

All that said, there’s little doubt that the economy has performed better than surveys suggested immediately after the referendum and, although we aimed off those significantly, somewhat more strongly than our near term forecasts as well.

But you see it is all perfectly reasonable in Ben’s Ivory Tower.

Well, again, one shouldn’t rush to judgement here.

If his forecasting performance was judged like premiership football managers then he would have been sacked many times over. Oh and the pension fund deficits which policies he supported have driven higher are nothing to do with him unless those same policies boost the economy in which case they were.

Dame Shafik pointed out more explicitly that the Bank of England had been wrong.

For example, Bank staff have revised up their forecast for the mature estimate of GDP growth in Q3 to 0.3% from 0.1% at the time of the August Inflation Report.

You may note that it too was wrong by being too low but being consistently wrong does not bother her in fact she prefers her own opinion to the data.

That’s where monetary policy can help, and it seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious.

She is not only convinced she is right but has fantasies about the impact of a small interest-rate cut or more QE (Quantitative Easing).

A Bazooka versus a pea shooter

It often gets forgotten that the UK Pound was falling in 2016 before the EU leave vote however it was a gradual decline compared to the drop which they followed. However we opened the year with an effective or trade-weighted exchange-rate of 90.37 which is now 74.2. Thus if we use the old Bank of England rule of thumb this fall is equivalent to a 4% reduction in Bank Rate which would mean it would need to be -3.5% now for the same effect if the pound had not fallen.

Meanwhile our central planners cut by 0.25% and were hinting at a cut of 0.15% next week to 0.1%. In case you are wondering why not to 0%? My view is that they are afraid that the banks rickety IT systems might not be able to cope with the number zero.  Also there is the QE but they have not finished the original £60 billion yet and anyway these days they find themselves having to defend themselves against claims that it has damaging side-effects.

Personal Forward Guidance

After a weekend pre-planned media farce we were told this by the Bank of England.

In a letter to the Chancellor, published this evening (Monday 31 October), the Governor said he would extend his term to the end of June 2019.

This was not always so although we need to go to HM Parliament to find it as it has disappeared from the Bank of England website.

 Dr Carney himself told us of several reasons for his preference for a five year term: “A five-year term is the right managerial timeline to relaunch the Bank of England”

Anyway six is the new five or something like that! My opinion is that something similar to what Roman Abramovich does with footballers over 30 at Chelsea is at play. They get one year contract extensions with the implication that they need to be on their mettle. A short leash but not as short as sometimes seen at the Heseltines.

The economy

This has proved much more resilient than the Bank of England ( 0.1%) growth or the UK Treasury ( between -0.1% and -1%) . Instead we saw economic growth of 0.5% reported in the third quarter of 2016. This morning has seen the latest Market business survey series completed telling us this.

the dominant UK service sector moved up a gear at the start of the final quarter of 2016. The rate of growth of total business activity accelerated to the fastest since January, as did new business expansion.

This meant that they concluded this.

Business activity is growing at a rate consistent with solid economic growth of 0.4-0.5% in the fourth quarter (the surveys suggest the initial 0.5% GDP growth estimate for the third quarter could be revised slightly lower). What’s especially reassuring is that growth is also becoming more balanced.

Rebalancing? A lot of care is needed there! But the UK economy continues to grow. If we look at the money supply surge I discussed on Monday and the lower level of the UK Pound that should be no surprise.


Predicting future Bank of England decisions has a clear error element, not least for the Bank of England itself as today’s update on some of its “Forward Guidance” proves. Actually this is a common central planning theme as we note that the US Federal Reserve has not so far produced any of the “3-5” interest-rate rises promised. The fog is added to by it telling us moves are “data dependent” whilst Ben Broadbent in particular at the Bank of England seems to be telling is that acting on data is dependent on him agreeing with it.

Meanwhile the elephant in the room is the likely rise in inflation next year which the Bank of England plans to “look through”. Of course a stronger than expected economy combined with inflation was once a recipe for interest-rate rises but apparently no longer. But the Bank of England has a lot of explaining to do as to why it eased monetary policy into a stronger than expected economy and a currency fall.

I will update if there is anything significant in the press conference later.

1pm update

We have seen quite a U-Turn from the Bank of England today. It is simply summed up by this statement from Mark Carney.

While the Committee now expects stronger growth through the balance of this year, it is the fall in sterling that will have the more significant implications for the path to inflation at the monetary policy horizon.

In spite of the rather desperate effort to take the credit for it I notice that even the usually supine press corps have so far all pointed out the mistakes. Even worse for someone who has cut interest-rates the first question was about a Bank Rate rise!

As a piece of advice it is probably best not to pass questions onto Ben Broadbent as Ivory Tower style waffling trying to tell us that up is indeed the new down does not help.

Tip TV Finance

Here are my views from yesterday.

Fiscal reflation in US is inevitable, BOJ is a mess – Not A Yes Man Economics


13 thoughts on “Mark Carney needs to explain why he eased policy in a currency decline

  1. Does MC need to explain, ir is the answer plain to see. The BoE has been seeking to devalue the £ and to allow inflation to erode debt levels since the credit crunch, without much success. Now Brexit appears to be doing the job for them and they are merely helping it along the way.

    In the same vein, when wondering what assurances HMG gave to Nissan that are both (i) likely to give some assurance that operating conditions in the UK will remain competitive, (ii) that HMG will be able to deliver and (iii) that are sufficiently sensitive to require politically damaging secrecy, one might consider the possibility that they undertook to pursue a weak £ strategy (as advocated in some comments on here).

    A weak £ looks like the only way the UK can attract inward investment, and this will be paid for in price inflation and a reduced standard of living for we hoi polloi.

    • Hi ChrisS-W and welcome to my corner of the web

      Something seems to happen to Bank of England Governors as they seem to end up as fans of a lower currency, like something out of Dr.Who. Actually I was not unhappy when the £ rose from March 2013 hoping that we could break the depreciation cycle partly for the reason you state which is that it is the road to us having inflation troubles.

      As to Nissan I do not know. We gave them a bribe to come here back in the day and like you I suspect they also got something this time around.

  2. Great interview on TipTV, Shaun. Regarding US fiscal policy after the election, it will be interesting to see what happens to one on-again, off-again reform to US Social Security, uprating benefits according to the C-CPI-U, the chained CPI:
    Obama took it out of his 2012 budget, after opposition to it became too fierce. It was a shame as there is no question that there is an upward substitution bias in the measurement of inflation in both the CPI-U and the CPI-W, which the C-CPI-U largely eliminates. We know now that Hillary Clinton was initially in favour of the change, although Bernie Sanders, who led the fight against C-CPI-U indexation in the 2012 budget, forced her to change her position during the Democratic nomination struggle. C-CPI-U upratings were one of the main elements in the Simpson-Bowles fiscal plan that Clinton heartily endorsed in a paid speech to Morgan-Stanley in April 2013. She refused to release transcripts of this or other paid speeches, but excerpts have emerged on Wikileaks.
    Trump, as far as I know, has never taken a position for or against the reform, although his main opponent for the Republican nomination, Ted Cruz,the token Canadian in the race, was a big supporter of C-CPI-U upratings.
    I suspect this is one reform that will get implemented during the next term whoever is elected, although it does go against the trend to fiscal expansion that you spoke of in your interview. Unfortunately the opponents of the reform have conflated two distinct questions: should Social Security recipients receive more benefits and should upratings intended to compensate Social Security recipients for the ravages of inflation overcompensate them because of an upward bias in the inflation measure. Whatever the answer is to the first question, the answer to the second question should be no.

    • Hi Andrew and thanks

      The chained CPI issue troubles me as whatever the reasons establishment moves always find in favour of the lower numbers. As by definition the worst off are likely to be social security recipients then a lower inflation measure for them has obvious issues. If it is so convincing why not replace the lot with it? How about a measure including those in rural areas..

      I suspect like you it is on its way so there will be a fiscal contraction from it, but I imagine it will be spent elsewhere.

  3. Hi Shaun, it is indeed misleading for Carney to suggest that the fall in the pound led the cut in IR which he specifically cited was implemented by him to offset with the immediate damaging effects of Brexit vite on both output and gdp.

    Now that gdp is proven rising economy looks just as vibrant he should logically return us to 0.5% or higher by my reasoning.

    That truth is that he is an alien tentacle of the squid and the GS brain is controlling his actions, not the UK govt or the best interests of the whole population of Britain.

    T.May seems to have blurted out some rational words a month ago but since then she has been pandering to our one tentacle, probably there is another one squeezing elsewhere?

    • Hi Paul

      Governor Carney tries to be an economic Time Lord as he claims the credit for the economy improving before he did anything ( half the services growth in the 3rd quarter came in July) but the fall in the £ was nothing to do with him. He was not pressed on this today but even so he was under pressure as he diverted questions to Ben “uncertain” Broadbent 3 times.

      As to the government have jettisoned a Chancellor they want to hold onto the Bank of England Governor for a while I think.

  4. Hi Shaun,
    All this reminds me of my manager years ago in the Civil Service. When faced with a very technical choice to make which he didn’t relish either way, he said – I’m the boss so there’s no question of being right or wrong.
    He then went on to explain how any decision can be justified, if necessary.

  5. Hi Shaun
    It seems,laughingly, that Carney and
    his Band of Brothers truly believe that they are
    right without question.
    This link shows that the son of the
    recent Nobel Prize winner can sing a bit aswell!


  6. Oxford economics suggest that the latest utterances of the BOE mean that they will now tack a back seat they herald a prolonged period of monetary policy inactivity. Iassume the Chancellor will take the front seat.
    Wolfgang Munchau also says that the BOE by their latest are showing that the vote was not the disaster they predicted and is a extraordinary turnaround.
    Revision of previous meeting seems to be the order of the day.

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