Governor Carney sees his interest-rate promises crumble again

Yesterday was quite a day in the life of Bank of England Governor Mark Carney as he faced the problems created by his own Forward Guidance on interest-rates, but later saw one of his hopes and dreams hover tantilisingly in the distance. It will have provided some variety as he pressed the control P button to make sure plenty of copies of his CV were ready to be sent to the International Monetary Fund rather than the usual printing of money. I will look more later at the developments there which had a side-effect of putting a tsunami through even the most fanatical adherents to the cult that continues to claim central banks are politically independent.

Also he was something of a TV star as well as apparently co-writing the script for the BBC2 documentary on the Bank of England.

The Bank is responsible for ensuring our money holds its value and it works tirelessly to protect the economy from the threat of high inflation.

Back to his current job

Governor Carney gave a speech to the Local Government Association and opened with a sentence which seemed to apply to the Bank of England.

These productions will mix tragedy and
comedy in a play whose themes range from magic and creation to betrayal and revenge.

Also if we move on from the PR spinning of the BBC documentary the Governor has a problem which he summarised like this.

In recent months, the expected paths of policy interest rates in advanced economies have shifted sharply
lower, most notably in the US where an expectation of two further rate hikes over the next three years has
flipped to four rate cuts by the end of next year. In the euro area, markets have begun to price in further rate
reductions and asset purchases

He could have mentioned that the Reserve Bank of Australia had cut interest-rates at two meetings in a row that day, which repeated what the Reserve Bank of India had already done earlier in 2019.

This is a problem because he has been giving Forward Guidance about interest-rate increases as the rest of the world has been planning for cuts. Here is how he explained this.

If Brexit progresses smoothly, we expect that the current heightened uncertainties facing companies and
households will fade gradually, business investment will rebound, the housing market to rally, and
consumption to grow broadly in line with households’ real incomes. This would accelerate economic growth,
strengthen domestic inflationary pressures, and require limited and gradual increases in interest rates in
order to return inflation sustainably to the 2% target.

So the UK economy would be able to stand aside from the trends affecting the rest of the world? For a country where trade is a very important part of the economy this is just a fantasy. What is an unreliable boyfriend to do in such circumstances? Step one is of course to put the blame elsewhere.

It is unsurprising that the path of interest rates consistent with achieving the inflation target in this scenario
differs from current market pricing of a lower expected path for Bank Rate given that the market places
significant weights on both the probability of No Deal and on cuts in Bank Rate in that event.

Yes the Brexit Klaxon has been deployed yet again by Governor Carney. This is an attempt to put a smokescreen over the fact that the world economy has been slowing for nearly a year now. After all the economy of Germany contracted in the third quarter of 2018. This morning’s weakening of the Caixin PMI in China notes that today’s weaker number for June is the lowest since October last year. Or to point it another way the attempt by Governor Carney to claim trade tariff problems started in May is an innovative version of history.

Actually in the course of a mere three sentences the Governor contradicts himself.

It just highlights the extent to which the levels of interest rates, sterling and other asset prices might increase if a deal were reached.

Becomes this.

We will also make a detailed assessment of the potential implications of the global sea change currently

In a smooth Brexit sterling and asset prices are likely to rise although of course many equities do not like higher sterling. But interest-rates higher in a “global sea change”?


The antennae of financial markets quickly picked up the hint that the unreliable boyfriend was limbering up to go on tour again. This saw the UK Gilt market continue its recent bull run and led to a couple of developments that will have embarrassed Governor Carney. Firstly the UK ten-year Gilt yield fell below the 0.75% Bank Rate and is 0.7% as I type this. Even more so both the two and five-year yields have fallen to 0.5% this morning so they are implying a 0.25% cut which is precisely the opposite of the rises in the Forward Guidance of Governor Carney.

Just as a reminder here is the BBC from the second of May.

Interest rate increases could be “more frequent” than expected if the economy performs as the Bank of England is expecting, governor Mark Carney says.

UK economy

There are doubts as to how accurate the Markit PMI business surveys are as we have seen them get things wrong such as late summer 2016 in the UK. But we also know that the Bank of England looks at it closely as it used it as a signal on its way to cutting Bank Rate to 0.25% in August of that year. So many eyes in Threadneedle Street will have been on this.

At 49.2 in June, the seasonally adjusted All Sector Output
Index fell from 50.7 in May and signalled a reduction in
overall private sector business activity for the first time in 35 months.

This was because the services sector at 50.2 was unable to offset the weaker manufacturing and construction estimates.


Governor Carney is preparing for yet another U-Turn as his Forward Guidance crumbles yet again in the face of reality. As a consistently unreliable boyfriend I guess he has a list of excuses ready for this. Yet as the day developed there was a further double-swing. The announcement that Christine Lagarde would leave the IMF and become President of the ECB had one clear positive for Governor Carney as the job he has long coveted suddenly became available hence my CV reference earlier. Perhaps he will discover some French ancestry too.

But this had a much more problematic swing as I note the words of the UK Chancellor Philip Hammond.

UK’s Hammond says Bank of England must not be politicized.

That initially provoked thoughts of the current Governor who attracted criticism for playing politics in his time as Governor of the Bank of Canada and has repeated that in the UK. However the appointment of a former French Finance Minister to head the ECB destroyed any fantasies of central banks being politically independent. After all she will be working with a Vice President ( De Guindos) who was formerly the Spanish Finance Minister. Can anybody spot a trend here?

This brought out a barrage of Fake News. For example Madame Lagarde was described as having a good reputation as others were pointing out this.

Useful reminder: Lagarde was judged guilty of gross negligence (ahem) by a French court over the insane payment to Bernard Tapie in the Credit Lyonnais case but escaped the one year jail sentence because (quoting) Of her « personnality» and “international reputation” and the fact that at the time she was fighting an « international financial crisis » ( @jeuasommenulle )

There was a time when being convicted in a fraud case would debar you from any sort of financial role let alone major ones. In the ordinary person’s world the CV would simply have been rejected. Still some places are managing to report that the ECB is safe from political interference now which really is an insult to readers.

Even the supporters of Madame Lagarde seem to be a bit thin on evidence that she has any real grasp of monetary policy. We do know that she helped put the Greek economy into an economic depression with the “shock and awe” policies of 2010 and 11 which she so vociferously supported. So in conclusion it was a good idea to pick a woman but a really bad idea to choose her.

23 thoughts on “Governor Carney sees his interest-rate promises crumble again

  1. I think Carney and May should do a stadium tour of the nation. The degree of unreality ought to match those legendary Yes concerts of old! How I would love to watch them duelling with light-sabres

  2. Hi Shaun
    Today I feel like becoming Mr Angry.

    To recap,after twelve years TPTB have only convinced
    themselves that their well trodden path of repeating
    the same error will cure all. Nepotism is still obviously
    rife and anyone with an iota of common sense will not
    be allowed to question their inadequacies. If you hold
    all the keys and have control of the “magic money tree”
    how can us mere mortals gain any influence, oh for that
    black swan event!


    • Hi JRH

      There are plenty around in the media and financial world who are cheerleading for Christine Lagarde. I have found they invariably fade away when you challenge them on details such as competency and corruption. As to nepotism it has always been with us but the modern era brings it more to our attention I think.

  3. To put the reversal in context just think – the ten year gilt touched 1.3% last October, it is simply unbelievable, and shows how far these madmen are prepared to go to preserve their positions and their power.

    If books are still allowed in the future, the history of these insane policies and the eventual outcomes will make future generations ask not only how it was ever allowed to happen but also why it was allowed to continue for so long before someone stopped them.

    I look forward to the next extension of his contract(expires January 2020) and the excuses proffered to explain why he has to stay,

    • Hi Kevin

      Your comment about the Gilt made me look up the futures contract. The October closing low was 119.59 on the tenth which compares to 131.93 tonight. Well done to those who have been long. But it is a bull market on top of a bull market.

      As to Mark Carney well it appears he may be in a bun fight with George Osborne for the IMF gig.

  4. Shaun

    To quote the bank “The Bank is responsible for ensuring our money holds its value and it works tirelessly to protect the economy from the threat of high inflation.”

    With a two year gilt yield of 0.48% when I last looked and the £ falling as well and RPI circa 3% the ‘real pound’ is being eroded by approximately 2.5% a year on my basic maths.

    The stock market reaches another high again I suppose part the reason is there is no where else to place cash apart from overpriced property.

    However it all depends which stocks one invests in retailers have slumped the last 12 months and large ones like Sainsburys and Marks & Spencer at that.

    Whether the rises in the stock market are sustainable is another thing and if the economy does go into recession many more stocks are bound to fall.

    I think a interest rate cut may come quicker now than some think all the data released lately points to a faltering economy and with concerns over BREXIT investment wont pick up soon neither will consumer spend.

    Other data out the last 24 hours from the BRC was shop prices fall for the first time since October 18

    • Yes I’m getting sick of this, every time I go to the shops the prices have dropped from the last time I visited, it’s about time Mark Carney did something about it.

  5. I can’t be bothered to comment on MC stupidity anymore – its all been said!
    So after some pretty awful election results, the old guard at the EU appoint their mates Legarde and von der Leyen, to the most senior positions (subject to MEP approval, of course – do they have a choice?). The EU is crying out for fundamental change and all we get is the same old!
    Of course, our next governor of the B of E, will be chosen as the best applicant and free from any political interference – as long as they are a mate of the PM.

    • Re Ms Lagarde’s peccadillos. Her predecessor was Strauss-Kahn who had his brushes with the law and Strauss-Kahn’s predecessor was Rodrigo Rato who was sentenced to 4½ years for abusing his business credit card. They do pick them, either that or the entire field is dodgy. Yes that’s probably it.

      • But this time it is different!!

        Ms Lagarde has got her conviction in BEFORE being handed the job!

        A new approach indeed.

  6. Hi Shaun,
    The very deep well is turning out to be very deep indeed and now reaches the antipodes. …. as I remember it ended in the Pool of Tears with Alice saying something like
    – oh dear, what nonsense I’m talking.

    There really is no hope, the trap is now closed. One lost decade over, only another one or two to go. TPTB have proved they can get away with talking it up while actually pushing it down. And not just once- continually.
    As the old saying goes – if you want to know where the boss is going watch his feet not his lips.

    • Hi Eric

      If we look at it in terms of the likely semi-finalists in the cricket world cup we see that there have been India (3), Australia (2) and New Zealand (1) interest-rate cuts so far this year. So England has missed out, well sort of.

      I think that this from Alice sums it all up.

      “Would you tell me, please, which way I ought to go from here?’
      ‘That depends a good deal on where you want to get to,’ said the Cat.
      ‘I don’t much care where -‘ said Alice.
      ‘Then it doesn’t matter which way you go,’ said the Cat.
      ‘- so long as I get SOMEWHERE,’ Alice added as an explanation.
      ‘Oh, you’re sure to do that,’ said the Cat, ‘if you only walk long enough.”

  7. Hello Shaun,

    re: ” in the course of a mere three sentences the Governor contradicts himself.”

    and no one in MSM reports this , only here.

    the biggest culprits of so called fake news is the MSM themselves…

    fascinating…. dementia or delusion do you think ?


    • Hi Forbin

      How much intention there is to produce Fake News I do not know. But I do know that more than a few places manage the news they issue rather than letting it flow.
      The capital markets editor of the FT was trying earlier to argue that Mario Draghi had no central banking experience before being President of the ECB. That seems too big a mistake to make when he got the job after being Governor of the Bank of Italy. It also supported the case for Lagarde getting the ECB job which of course the FT could not be happier about.

    • Hi Arthur

      There is a bit to add and it fits with the ECB news. The woman who picks up her papers towards the end of the film was Dr. Nemat Shafik. She came from the IMF along with some boasts about what she had achieved. It turned out she was so out of her depth they had to make her a Dame and send her off to run the LSE before the end of her term.

  8. The BOE/BBC PR piece on the BOE was a bit of an insight into something which I had suspected ie there are a lot of “bright young things” faffing about in offices with endless meetings and presentations whereas there only seemed to be one agent to cover the whole of the NW of England so he was the only one out in the field and able to see what goes on in the real world.

    As for Christine Lagarde going to the ECB, words fail me. The sooner we get away from the EU the better.

    • Akin to letting Gary Gliiter off for his services to music then putting him in charge of Education.

      But its OK as surely this is all a dream and its not really happening, its the only viable explanation i can come up with.

  9. Great blog as usual, Shaun.
    I am not sure what the provenance of Chart 4: Global economic policy uncertainty reached record highs is in Carney’s paper, but it was most definitely not the NBER paper cited: “Measuring economic policy uncertainty”, published in 2015, while Carney’s chart carries us through 2019. Early in 2015 “Ukraine/ISIS” is highlighted. The NBER paper’s Figure 4 shows the Ukraine conflict as generating two peaks in the index of economic policy uncertainty for Russia in 2014. It isn’t specifically mentioned in any of the charts for the US or other countries. The downing of MH17 was in July 2017, which seems to account for the second peak in Figure 4. What does Carney’s “Ukraine/ISIS” marker relate to? Was he listening to voices in his head?

    • Hi Andrew and thank you

      That is a good spot as how can a paper published in 2015 have a reference to 2016,17.18 and 19? Also if we give them the benefit of the doubt and say they have applied the methodology from that paper the post 2015 scale looks all wrong. How does the implementation of tariffs on China register twice as much as 9/11? Or far higher than the initial impact of the credit crunch….

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.