The Mark Carney Show has misfired again

Yesterday was something of an epoch-making day for the UK but it also turned into a rather odd one. Also this morning has produced another piece of evidence for my argument that we finally got a rise in official interest-rates above the emergency 0.5% level because the Bank of England finally thought the banks have recovered enough to take it. From the Financial Times.

Royal Bank of Scotland will pay its first dividend since it was bailed out during the financial crisis, marking a major milestone on the bank’s road to recovery and paving the way for a further reduction of the government’s 62.4 per cent stake. The bank will pay an interim dividend of 2p per share after it confirms a final agreement on a recent fine with the US Department of Justice.

So even RBS has made some progress although it remains attracted to disasters like iron filings to a magnet as this seems a clear hint that it managed to be long Italian bonds into the heavy falls.

 RBS blamed “turbulence in European bond markets” for a 20 per cent drop in income at Natwest Markets.

As an aside the Italian bond market is being hit again today with the ten-year yield pushing over 3%.

Returning to the UK we also saw a 9-0 vote for a Bank Rate rise as I predicted in my podcast. This was based on my long-running theme that they are a bunch of “Carney’s Cronies” as five others suddenly changed their mind at the same moment as him, making the most popular phrase “I agree with Mark”. As some are on larger salaries added to by generous pension schemes we could make savings here.

A Space Oddity

This was provided by the currency markets which initially saw the UK Pound £ rally but then it fell back and at the time of writing it has dipped just below US$1.30. The US Dollar has been strong but at 1.122 we have not gained any ground against the Euro either at 145 we lost ground against the Japanese Yen.Why?

At first Governor Carney backed up his interest-rate rise with talk of more as in the press conference he suggested that 3 rises over the next 3 years was his central aim. Of course his aim has hardly been true but this disappeared in something of a puff of smoke when he later pointed out that he could keep interest-rates the same or even cut them. This rather brain-dead moment was reinforced by pointing out that he had cut interest-rates after the EU leave vote. This left listeners and viewers thinking will he cut next March?

Then he told Sky News this.

Mark Carney tells me is prepared to cut interest rates back again depending on how Brexit negotiations go. ( Ed Conway)

This morning he has managed to end up discussing interest-rate cuts with Francine Lacqua of Bloomberg after a brief mention of further rises. Then he added to it with this.

Mark Carney threw himself back into the thick of the Brexit debate on Friday, saying the chance of the U.K. dropping out of the European Union without a deal is “uncomfortably high.”

He also spoke to the Today programme on Radio Four which of course has its own audience troubles and here is the take away of Tom Newton Dunn of The Sun,

Blimey. Carney reveals the BoE recently ran a Brexit no deal exercise that saw property prices plummet by a third, interest rates go up to 4%, unemployment up to 9%, and a full-blown recession.

You can see from that why rather than a rally the UK Pound £ has struggled rather than rallied.  Due to his strong personal views Governor Carney keeps finding himself enmeshed in the Brexit debate which given his views on the subject will always head towards talk of interest-rate cuts. He is of course entitled to his personal views but in his professional life he keeps tripping over his own feet as just after you have raised interest-rates this is not the time for it. He could simply have said that like everyone else he is waiting for developments and will respond if necessary when events change.

Oh and we have heard this sort of thing from Governor Carney before. How did it work out last time?

interest rates go up to 4%


Today’s News

This has added to the theme I posited yesterday about the interest-rate increase which can be put most simply as why now?

The latest survey marked two years of sustained
new business growth across the service sector
economy. However, the rate of expansion eased
since June and was softer than seen on average
over this period. ( Markit PMI )

This followed a solid manufacturing report and a strong construction one but of course the services sector is by far the largest. This added to the report from the Euro area.

If the headline index continues to track at its current
level, quarterly GDP growth over the third quarter as
a whole would be little-changed from the softer-than expected expansion of 0.3% signalled by official
Eurostat data for quarter two.

Whilst these surveys are by no mean perfect guides there does seem to be something going on here and as I pointed out yesterday it is consistent with the weaker trajectory for money supply growth.

The UK Pound £

This did get a mention in the Minutes.

The sterling effective exchange rate had depreciated slightly since the Committee’s previous meeting and was down 2.5% relative to the 15-day average incorporated in the May Report.

This is awkward on two fronts. Firstly the fall was at least partly caused by the way Governor Carney and his colleagues clearly hinted at an interest-rate rise back then but then got cold feet in the manner of an unreliable boyfriend. Next comes the realisation that all the furore over a 0.25% interest-rate rise mostly ignores the fact that monetary conditions have eased as the currency fall is equivalent to a ~0.6% cut.


This appeared having been newly minted in the Bank of England Ivory Tower. Or at least newly minted in £ terms as the San Francisco Fed put it like this last year.

The “natural” rate of interest, or r-star (r*), is the inflation-adjusted, short-term interest rate that is consistent
with full use of economic resources and steady inflation near the Fed’s target level.

If anyone has a perfect definition of “full use of economic resources” then please send it to every Ivory Tower you can find as they need one. Actually the Bank of England has by its actions suggested it is near to here which is rather awkward when they want to claim it is somewhere above 2%. Actually I see no reason why there is only one and in fact it seems likely to be very unstable but in many ways David Goodman of Bloomberg has nailed it.

They don’t know their r* from their elbow


This is all something of a dog’s dinner and I mean that in the poetic sense because in reality dog’s in my family  always seem to be fed pretty well. We have monetary policy being delivered by someone who looks as though he does not really believe in it. Even the traditional support from ex Bank of England staff seems to be half-hearted this time around and remember that group usually behave as if The Stepford Wives is not only their favourite film but a role-model.

If this is the best that Mark Carney can do then the extension of his term of tenure by Chancellor Hammond can be summed up by Men At Work.

It’s a mistake, it’s a mistake
It’s a mistake, it’s a mistake





36 thoughts on “The Mark Carney Show has misfired again

  1. So he is warning of the danger of a no deal Brexit, just after putting up interest rates – what a plonker!
    Sorry, Shaun, not a very reasoned response to your excellent blog, but I see no point in commenting on what these fools get up too!

  2. I think that you’re incredibly unfair on the great man Carney. When asked on the today programme about his dire pre-Brexit vote predictions and how he got them wrong, he pointed out that it was the BoE’s swift actions that prevented disaster, so his predictions were right. Indeed, he went on to say that GDP is between 1.5 and 2% lower than it would have been had it not been for the Brexit vote.
    We are fortunate indeed to have a man at the helm who
    1. Predicted everything correctly
    2. Personally ensured that the disaster predicted was averted
    3. Can even tell us exactly what would have happened had Brexit not happened.
    There was then a supreme moment when he was asked if he wanted to become Prime Minister of Canada, which he clearly didn’t want to answer.
    A pure picture of arrogance.

        • He won’t go back there as the property bubble he nurtured in Canada before he came to the UK is beginning to unravel. Like all these conmen, he has to keep moving so as to avoid being blamed for the consequences of his policies.

    • Thanks for the entertaining summary, James. Carney was definitely looking at making a bid for the leadership of the Liberal Party of Canada in 2012, as related by Université Laval monetary economist Stephen Gordon, with links that provide more information:
      After being the first Bank of Canada Governor to speak to the Canadian Auto Workers, as Professor Gordon mentions, in October, Carney made a speech in the small (but charming!) British Columbia port of Nanaimo, which was also unprecedented. At the time, Carney bootlickers, a category that included virtually all Canadian financial reporters, gushed about how he was trying to expand the role of Governor and bring the Bank’s message to audiences that had been previously ignored. They should have been writing about how disgusting it was that a man occupying what was supposed to be a completely non-partisan role would be conducting a feeler operation for how well he might fare in a Liberal leadership race. Carney has no clue how a central banker should behave himself, and as you say, he is “a pure picture of arrogance”, so when he gets called out he denies all wrongdoing. Imagine a Governor of the Bank of England using expressions like “cliff-edge Brexit! ” I agree with Foxy, if he comes back, then “God help Canada!”

      • Glad to have amused you! I’m always worried about sarcasm on websites as people don’t get it but thankfully this blog has intelligent correspondents!

  3. Shaun, I don’t know where to start:

    – 3 rises in 3 years?! Why would we pay his salary – put him on a zero hours contract.

    – A worst case Brexit bust with affordable houses, normal interest rates and unemployment lower than some Euro countries have today even in the midst of ECB QE?

    And to make my apoplexy worse, the BBC 10 o’clock news described the move as “just the second interest rate rise since 2009”. I understand what they mean but it could have been better phrased, to show the true extent of the ZIRP period and the significance of the direction of travel.

    Back to bed for me.

    • The BBC cannot believe its luck, finding someone in authority and “independent” to slag off Brexit. Carney was treated with kid gloves throughout the Today interview. I had to switch over to radio 3.

  4. One thing about r* and that is that it is inversely related to leverage: the higher the leverage the lower the r* value.

    If you believe in r* then the BOE should be continually reducing rates because leverage has done nothing but climb since 2008. What it points to is the fact that they cannot increase them without blowing the economy up and that’s the position they are in.

    But how does this correct? I think the answer is that it doesn’t and that what is happening is that Carney et al know full well it will all end in tears but want to avoid precipitating the crash by their actions but want to be passive spectators when it all goes wrong so they can trot out the excuse that “we never saw it coming”.

    • Hi Bob J

      They do love their rules. The problem is that when they are exposed to reality they fail again and again.The most spectacular examples have been the natural rate of unemployment which did get a mention in the presser yesterday from a journalist and the output gap.

      Let us be nice and say their error range on the natural rate of unemployment has been 2.25%. So r* is somewhere between 0% and 5% ……

  5. Why is Carnage setting out his interest rate plans until the next general election, when his term ends next year?
    When Hammond wrote the speech, did he forget to take this into account?

    • Hi therrawbuzzin

      Yes there are obvious problems there before we even get to his enthusiasm for mentioning interest-rate cuts. They are trying to present their plans in the manner of a science but of course if it was the plane would have crashed on take-off due to them forgetting the wings.

  6. The funny thing about all the criticisms of Trump, is that he is pursuing exactly what I think is the best way to get back to a ‘normalised’ interest rate with massive fiscal stimulus and protecting his markets as the currency rises. In that way he restores ‘capitalism’ and that will see the US economy power ahead as they are able to make better, more economic, decisions than the rest of the world pursuing their money printing/depressed currency policies to steal demand across the globe.

    • Of course he is, that is why he is so despised by globalists.
      They don’t want normality, they want UN Agenda 21.
      Putin isn’t a globalist either, that’s why he too is a bogeyman, and it’s why the globalists are doing anything they can to:
      1) “Prove” collusion between the two.
      2)Discredit Putin with murderous false flag ops from just outside Porton Down, to Damascus.

      • I agree, they hate Trump for his audacity to execute a dangerous but probably essential return to the former version of capitalism. As you say the cronyists are beside themseleves that their underhand domination will be revealed.

  7. Since many of the once accepted economic propositions no longer seem to work, what is there in the last ten years that suggests that interest rates will still squeeze out inflation, or indeed that low interest rates will cause inflation? Japan anyone.

    • Hi Peter

      In terms of how the Bank of England wants inflation measured ( CPI for now and maybe CPIH looking ahead) then the anti-inflation effect of a 0.25% rise in Bank Rate is not much if the £ does nothing. For inflation as I would measure it then there would be an impact on house prices from higher mortgage rates.

      Of course the all items RPI will rise a little bit because it has mortgage rates in it ( 2.4% weighting)

  8. No mention by Carney that a ‘deal’ Brexit could have the same result,given the problems of an over leveraged banking system are really nothing to do with Brexit.

    Fisher must be turning in his grave

    • Hi Dutch

      Actually the rest of the world and other economic possibilities were simply ignored. A proper discussion might have been around the Euro area slow down and the ( so far ) US boom but instead there only appears to be one topic.

    • Hi Kevin

      I wish I could buy beer at the price you are doing 😦 A week ot two ago I raised a laugh at a presentation by discussing a £5 cup of coffee and then saying that was too expensive even for London. However I noted someone on Twitter posting their receipt for a cup of coffee and it was £6.75.

      To be fair to the Guardian there it is reasonably composed. A lower impact on mortgages than in the past due to the increased use of fixed-rates and savers see only a slow and lower change.Put like that it is not that big a deal.

  9. “BoE’s Carney sees ‘uncomfortably high’ risk of no-deal Brexit”

    considering his track record then Brexit is going to be a success …..


  10. ” MPs study value for money from pensions”

    after 10 year of emergency IR I guess they’ll conclude no one could have foreseen this and that MC has a sterling track record ……

    jeeezsh !


  11. If the BOE thought raising rates would strengthen sterling its backfired miserably. You cannot beat the markets and the markets were betting there would have to be further cuts going forward.

    The BOE really needed more information imo, service sector growth figures today showed a weakening, so did Europe.

    If in doubt do nothing and I think the BOE acted too quickly, and will have to cut again before too long.

    • Hi Peter

      There have been several chances to raise Bank Rate but the boar sailed without the Bank of England on it. On such a road some of the build up of debt would have not happened nor would house prices risen so high.

      Instead as you say Thursday’s rise increases the chance of the next move being a cut.

  12. Great blog as usual, Shaun.
    Regarding the Inflation Report press conference yesterday Carney said in his opening remarks that “real wages are picking up” and none of the reporters pushed back on his claim. It doesn’t derive from the IR itself, which only looks at nominal wages. Chart 3.9 shows the 12-month changes in regular pay, based on single months, not three month averages. Using the CPIH as a deflator, as the ONS now does, the annual rate of change for real wages has been positive from January 2018. However, if you use the more plausible RPIJ as the deflator, you only above zero increases starting in April and May, both 0.2%. If you turn to total pay, using the CPIH as a deflator, real wages have shown annual increases every month since December. Switch to the RPIJ and every month since June 2017 has seen an annual decrease in real wages except for April (+0.0%). Of course, if you use the RPI as a deflator the situation is even worse. It’s hardly a picky point as a central bank should think twice about raising interest rates with real wages falling, and Carney is on very weak ground stating that they have been rising.
    The opening remarks ended with what was surely a presumptuous statement: “he MPC will respond to any persistent change in the outlook to bring inflation sustainably back to 2% target while supporting jobs and activity. That is how we set policy two years ago, it is how we are setting it today, and it is how we will do so in the future.” Carney has less than a year in office. It’s not for him to dictate what the target rate will be in future, not that it was ever his call at any time, since he takes his remit from the Chancellor of the Exchequer. Monetary policy in the UK would be better with a lower target rate than 2%. Carney can argue otherwise if he chooses to, but he shouldn’t presume to speak ex cathedra.

    • Hi Andrew and thank you

      You are right about the real wages point which went unchallenged and my thoughts were “it depends on which inflation measure is used”. The press corps missed the opportunity to raise the issue.

      As to his point about setting policy to achieve a 2% inflation target he contradicted himself about this too as at one point he referred to the August 2016 Bank Rate cut and mentioned a trade-off. The trade-off was plainly higher inflation.

      Perhaps he is bored now and regrets agreeing to stay for the extra year.

  13. Shaun, well I blame you for his actions. He is thin skinned and I reckon your “un-reliable boyfriend” moniker got to him. Carney thought I will show Shaun, I’m going to do something!

    Wrong thing as you say though.

    A bit like actually turning up for a date, but being late and not paying… still unreliable I would say.


  14. Shaun, Box 2 of the Inflation Report contains a reference to a 2017 paper on nowcasting at the BoE by Nikoleta Anesti et al. If you blogged about it earlier I don’t remember, I don’t recall. It contains about as close to a mea culpa as one is likely to get from the BoE for nowcasting 0.1% real GDP growth for 2016Q3 in the August 2016 IR, when the preliminary estimate turned out to be 0.5%. Apparently the nowcast was based on three different models, industry, combined-MIDAS and dynamic factor, which showed real GDP growth rates of 0.1%, 0.1% and 0.3% respectively. The dynamic factor model did better than the others because it relied more on actual official data that had emerged for the quarter, and less on the much too pessimistic PMI surveys. The authors state that: “the MPC took a limited signal from the post‑referendum surveys, and its near‑term outlook was not as pessimistic as the average of other forecasters: upon extensive analysis of a broader range of data, and being alert to the possibility of excessive volatility in the available data, the committee judged it appropriate to aim up from the negative growth rates suggested by prominent indicators such as the Markit/CIPS PMIs.” Well, it could have been worse, I suppose. However, what they indicate is that the MPS for all practical purposes ignored the dynamic factor model, the model most sensitive to the positive actual data that was coming in, and instead favoured the models heavily reliant on the negative growth rates coming from the PMIs. The authors also say that while this is a cautionary tale, the Brexit referendum was an unprecedented event so whether “ it will provide much additional guidance on the extent to which the nowcaster should ‘aim off’ the model outputs in future is questionable.” Is this really so? It would seem to me that when the UK actually leaves the EU, BoE nowcasters could find themselves in a very similar position, particularly if it turns out to be what Calamity Carney would call a “cliff-edge Brexit.”

    • Hi Andrew

      I have not referred to that paper so thank you I will take a look. Your comment made me recheck Ben Broadbent’s speech from October 2016.

      “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 nearterm
      forecasts as well. The central projection in the August Inflation Report didn’t involve a recession, simply a slowing in the economy’s rate of growth. But that slowing looks so far to have been more moderate than
      we feared. ”

      It is a long winded way of saying they were wrong isn’t it?

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