Was Carney too quick to cut interest rates?

THE strength of Britain’s economic bounce from the shock of the Brexit vote raises big questions about whether the governor of the Bank of England, Mark Carney, really needed to cut interest rates last month and embark on a huge programme of printing more money.

The fact is that the cut in the bank rate to 0.25 per cent has not only hurt savers and pension funds but it has led to big lenders, such as the Royal Bank of Scotland, to start charging companies for keeping deposits in the bank.

This introduction of negative interest rates – in effect, charging customers to deposit money – is a disreputable ruse and many blame Carney.

Indeed, the Canadian who previously worked for Goldman Sachs was a controversial appointment when given the job by then chancellor George Osborne more than three years ago.

Carney compounded matters by then being considered ‘ too close’ to Osborne and becoming a mouthpiece for Remain during the EU referendum campaign. Critics accused him of partisanship for his numerous and vociferous warnings over the dire future of the UK’s economy in the event of Britain leaving the EU.

In addition, he’s been called the ‘unreliable boyfriend’ by City wags because of his frequent changes of view on the direction of interest rates.

Recent economic data suggests that Carney and the Bank’s Monetary Policy Committee, which sets interest rates, may have been wrong when they warned last month about the risks of higher inflation, a weaker economy and a potential rise in unemployment.

True, inflation has shown signs of going up as a result of the fall in the value of the pound (which has meant imported goods are more expensive) but there are very few signs that our economy is weakening. In truth, retail sales are booming, consumer confidence is high and the number of people on the dole has dropped.

To add to the rosy picture, manufacturing is picking up strongly, investment intentions are looking better and the nation’s exporters are happily selling to the US, Asia and across the world.

For his part, as chairman of the Financial Stability Board, a global organisation set up after the 2008 world crisis to help resist a future meltdown, Carney is far more closely tied into the global economic establishment than were many of his predecessors as governor of the Bank of England.

That may be a good thing for the City as a global financial centre, but it also means that Carney’s mindset is less focused on purely British interests.

Being in constant contact with global organisations such as the G20 finance ministers from the world’s largest economies and the International Monetary Fund, he is more prone to the ‘group think’ of global policy-makers and bureaucrats.

Ahead of the EU referendum, all these major organisations had convinced themselves that if the British people voted for Brexit, it would pose the greatest challenge to the global economy in 2016. Carney clearly bought into this one-sided view.

Clearly shocked by the result, in the immediate aftermath he was rolled out to reassure the British people that the banking system was safe.

Then he announced an emergency package of measures that included the interest rate reduction and an enormous £60billion of quantitative easing (or printing extra money) in order to try to stimulate the economy by encouraging spending and investment.

The Monetary Policy Committee’s vote to cut interest rates to 0.25 per cent was unanimous among the nine members – but significantly there were three dissenters over whether to print extra money.

The decision was clearly made in part as a reaction to what happened in 2009 when the Bank was criticised, after the financial crisis, for moving too slowly over interest rates.

However, the decision to cut the rate – the first fall for seven years – is now starting to look rash and has suffered for having been made in the heat of the after-burn of the Brexit vote when the political world was in shock and prime minister David Cameron had been forced to resign.

On the positive side, the rate cut has reassured borrowers – and particularly those with mortgages – which is vital at a time when the housing market is already unsteady as a result of big stamp duty increases, tougher rules on getting a mortgage and tax penalties on second homes.

BUT it has been disastrous for savers, who have seen returns slashed even further and who are confused about where to put their savings when returns are so low. There’s been an even more deleterious impact on pension funds with deficit projections climbing by £100billion to £710billion, according to the latest PwC data.

All this is a major challenge for Mark Carney. Initially, his choice as governor of the Bank of England was welcomed because in his previous job he had steered Canada’s economy and banking system through the financial crisis with the minimum of disruption. But guiding the world’s fifth largest economy and being in charge of the City of London, the world’s biggest banking and foreign exchange centre, is a vastly different matter.

After a summer when there was a sparkle on his face – a large glitter tattoo he wore to attend a hippy music festival – the dark clouds could gather with Carney humiliatingly forced into yet another policy U-turn.