Last night the Governor of the Bank of England Mark Carney gave a speech which was extraordinary even for him. At the Society of Professional Economists he stood up and immediately took listeners into a parallel universe that was like the episode in Star Trek where Spock was irrational and violent.
Our guidance means that those who follow us will be better able to anticipate our actions. It will make those
actions more powerful. And it will help households and businesses consume, save, hire and invest with
confidence as the UK determines its path forward.
Just for clarity he is talking about the Forward Guidance of the Bank of England where he has promised interest-rate rises and not only not delivered them but of course ended up making a cut and adding £60 billion of Quantitative Easing. So guiding you in the wrong direction up the garden path helps? Well apparently it is most helpful when he sends you the wrong way.
Guidance is most useful at such turning points.
I was challenged on social media last night by those who claimed he has never promised interest-rate rises. I responded by taking them back to Mansion House in June 2014 when Governor Carney announced this.
There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
It could happen sooner than markets currently expect.
This is because central bankers speak in code as Alan Greenspan of the US Federal Reserve pointed out back in the day.
I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.
Returning to June 2014 financial markets were sure they knew what Mark Carney meant and that was that an interest-rate rise was coming soon. In response the Short Future for interest-rate expectations soared as did the UK Pound £. Here is a nuance to this which is that those who were going to be right as in nothing would happen were probably stopped out of their positions. This was added to by even David ” I can see for” Miles the easing fan writing this about interest-rate rises in the Sunday Telegraph.
But that day is coming.
Back in my days on Mindful Money I pointed this out on the 24th of June 2014.
If we were in America then Mark Carney would be called a “flip-flopper” as we have had a lot of different types of Forward Guidance from an individual who has not yet been in office for a year. Others may be wondering at Mark Carney’s claim that he has met “thousands of businesses” in less than a year which is quite a rate!
The version according to Mark Carney
the MPC would not even think about tightening policy at least until the unemployment rate had fallen below 7%
Which went wrong about as fast as it could as even the Governor admits.
In the event, the unemployment rate fell far faster than we had expected, falling below 7% in February 2014
If we skip the obvious issue of Forward Guidance from an organisation making yet another large forecasting error there is a clear issue of logic. This is that a sharp fall in unemployment suggests a stronger economy and thus Bank Rate rises as it is a measure according to Governor Carney that is.
– a clear and widely understood indicator of the degree of slack
But apparently less slack meant this.
That guidance was effective. Surveys conducted in the months that followed indicated high awareness of it
among companies, with almost half reporting that they expected Bank Rate to remain at low levels for longer
than they would have done were guidance not in place
So it worked by being wrong! Of course if we switch to the real world companies were probably ignoring all the “flip-flopping” that was already evident. After all he had only been Governor for a year when this happened. From the BBC.
The Bank of England has acted like an “unreliable boyfriend” in hints over interest rate rises, according to MP Pat McFadden…………
“We’ve had a lot of different signals,” he said. “I mean it strikes me that the Bank’s behaving a bit like a sort of unreliable boyfriend.
“One day hot, one day cold, and the people on the other side of the message are left not really knowing where they stand.”
Apparently misleading is helpful
The next section was aptly described by Earth Wind and Fire.
Every man has a place
In his heart there’s a space
And the world can’t erase his fantasies
We find that according to Governor Carney being an unreliable boyfriend brings a whole raft of benefits.
The MPC’s guidance speaks first and foremost to UK households and businesses.
Okay so he is swerving away from the financial markets he has misled to take us where?
And last year, we introduced layered communications, with simpler, more accessible language and graphics to
reach the broadest possible audience.
So we have had some dumbing down and then climbed the steps to the highest Ivory Tower he could find.
It now publishes its best collective judgments on the natural rate of unemployment, the output gap, as well as the
expected growth in productivity, labour supply and potential output.
I would like to pick out just one to illustrate how lost in the clouds this particular Ivory Tower is and that is the natural rate of unemployment. Was it the 7% he first used? Er no. In fact on the 28th of June 2014 it was already in disarray.
Governor Mark Carney pointed out that some work had suggested that the equilibrium unemployment rate (the lowest rate compatible with non-accelerating inflation) may be more like 5.5% than the 6.5% previously used.
I cannot recall if it went to 5% but it did go to 4.5% and is now 4.25%. Imagine the Bank of England had used such “science” to design the Titanic. They would be able to claim that it had not hit the iceberg but only because it would have sunk before it got out of port.
Reality got most suspended here.
The interest rate expectations of households and businesses have remained in line with the MPC’s limited
and gradual guidance………Guidance has reduced the impact of economic uncertainty on short-term interest rates
No the regular hints of an interest-rate rise have increased uncertainty especially when as has so often happened the unreliable boyfriend has flip-flopped. Ironically the next bit is true but not for the reasons given.
Guidance has dampened the volatility of interest rates, consistent with the expected and actual path of policy
rates (Chart 4). Guidance has reduced the impact of economic uncertainty on short-term interest rates.
The truth is that fewer and fewer people take any notice of his pronouncements. This was highlighted last night by the way the UK Pound £ responded with a yawn to the speech. Such a development must be most hurtful to someone whose ego is such that they changed the Bank of England website to have “Latest from the Governor” on the front page.
This is provided by two responses to last night’s speech. Here is a view which is clear on one side.
Okay so the only way is up! Or perhaps not. From Reuters.
The Bank of England could pump more stimulus into Britain’s economy if this year’s Brexit negotiations result in a bad deal, BoE governor Mark Carney said on Thursday.
In the past this would have been considered to be a masterly speech from a central bank Governor but not when he/she is claiming to provide Forward Guidance. because as you can see they can claim to be right whatever happens via some selective cherry picking but the ordinary person can not.
Why might Governor Carney hint at interest-rate rises and not do them. As ever the “precious” seems to be in the mix. From @IrkHudson.
Helps banks margins