Carney’s ‘go for it’ message to Bank’s monetary policymakers
Acopy of Mark Carney’s introductory remarks for this week’s meeting of the Monetary Policy Committee – where members are expected to raise Bank Rate by a quarter of a point – has fortuitously fallen into my hands. In the interests of open government, it is only right that I here reproduce a number of edited highlights from his remarks.
“Now look. This time we really do need to raise interest rates. I’ve been promising it for years, but each time events have got in the way, and we’ve been forced to row back, a habit which somewhat annoyingly has earned me the reputation of being an ‘unreliable boyfriend’.
“I know that the data again doesn’t exactly support a rate rise. As likely as not, we may soon be cutting again. But we can’t keep on sending the wrong signals to markets, and more so than ever, there is a sense in which we must this time either deliver or finally lose all credibility.
“Besides, the way things are going, I’ll have been through my entire six years as Governor of the Bank of England without having once raised rates. OK, so we did manage it last November, but that only reversed the emergency cut we did after the referendum, so it doesn’t really count.
“Rates are still basically set for a depression; with pretty much full employment, we cannot with a straight face any longer pretend that today’s economy is still the traumatised, juddering wreck it was in the immediate aftermath of the financial crisis. That was nearly 10 years ago, for heaven’s sake.
“As everyone knows, I was bitterly opposed to Brexit and continue to think it one of the biggest acts of economic self-harm of the post-war era. I think everyone around this table essentially concurs [muffled sound of ‘hear, hear’ and gentle tapping the table in agreement]. Only beyond these walls, I cannot say these things as fulsomely as I would like, more’s the pity.
“What I find so depressing is that were it not for Brexit, the UK economy would now be booming; we would indeed be positively overheating, and Bank Rate would already have been up at 1.5pc, even 2pc. Yet some things are not to be, and we must face the world as it is.
“But please don’t accuse me of defeatist, ‘remoaner’ pessimism. I know the Bank is very much associated with Project Fear, but that’s not the way we see things today. If anything, we are on the optimistic side of the debate in our projections.
“We chose to see the soft patch of the first quarter as essentially a weather-related blip, rather than something more fundamental – more ‘Beast from the East’ than Brexit regret.
“Slightly worryingly, however, the second quarter is unlikely to have shown the bounce-back I would have liked. If it is just 0.4pc growth, that is no more than trend for a quarter which should have been higher when clawing back the lost growth of the previous three months. It doesn’t bode well for the rest of the year.
“Setting the uncertainties of Brexit aside for the moment, the situation internationally doesn’t look so great either. The eurozone saw growth of just 0.3pc in the second quarter, while China is plainly slowing fast. Only the US seems to have the wind in its sails.
“But absent of president Trump managing entirely to suspend the usual rules of economics, this happy state of affairs is, unfortunately, unlikely to last. My banker friends say things are softening already. About the only thing that justifies a rise in rates is the prospect of a return to real wage growth, so we need to big up that aspect of the story as much as we can. It’s a tough one, though. You Brits just will not save. You are as bad if not worse than the Canadians.
“Look after the present and the future will take care of itself is not such a bad modus operandi, but to be saving nothing at all in aggregate, as the latest figures suggest? This surely is taking our spendthrift ways too far.
“The problem we have got is that if households rediscover the saving habit, it’s going to mean less money for spending.
“It’s what Keynes called the ‘paradox of thrift’. It may be the prudent thing to do, but it won’t be good for short-term growth.
“Yet try we must to bring back a semblance of the old normality to monetary policy. The lack of any meaningful productivity growth means that we may soon be knocking up against capacity constraints in the economy, increasing inflationary pressures. I don’t say that a no-deal Brexit is at all likely. Only outliers think it would be anything other than bad for all parties, at least in the medium term, so it is not something that either side in the negotiations would actively seek.
“But I long since gave up on politically rational outcomes, and its chances have plainly increased in recent weeks. Attitudes seem to be hardening on both sides of the negotiating table. In any case, we must be fully prepared for all eventualities. It would be good to have the capacity to cut rates should the unthinkable happen. That’s another reason we must ease rates up while we still can.
“Here we sit beneath a portrait of the late and great Sir Montagu Norman, governor of the Bank from 1920 to 1944 [snorts of stifled laughter]. I’m told that it was a standing joke with one of your predecessors when confronted by an awkward policy decision to think, ‘what would Sir Montagu have done’, and then vote the opposite.
“It is my unfortunate duty to tell you that Norman would undoubtedly have voted for a rate rise. So hold your nose, vote for a rise, and hope for the best. If there are any voices of dissent, I don’t want to hear them. For better or worse, we live in a world of extremes, of one thing or the other. No more fence-sitting.”
As you will have guessed, presumably from line one, this is not actually what Carney plans to say. His message will be far more nuanced and sophisticated than my imaginings. Yet in essence, it broadly reflects the state of the debate. To my mind, the Bank missed its chance to raise rates a year ago, when it could have done so with relatively little consequence. But even now, I doubt a quarter point will unduly frighten the horses; it’s already pretty much factored in. All the same, central bankers have a habit of being behind the curve, and it seems all too likely that having finally plucked up the courage to tighten, their timing is again off, with the economy about to hit the buffers once more. Indeed, their actions might ensure it.
Markets rarely do much in August. Those left behind to man the trading desks are under strict instructions to keep positions as neutral as possible.
But expect trouble when the “grown-ups” return – political and economic. It’s all shaping up to be an exceptionally turbulent autumn.
The Bank of England may be glad of the quarter point it is likely to claw back this week. More than likely, it will soon once again be in need of some monetary firepower.
‘Central bankers have a habit of being behind the curve, and it seems likely their timing is again off’