Carney must back recovery
AS HE navigates his final year as governor, Mark Carney likes to think that it is he and the Bank of England that are responsible for stabilising the post-referendum economy.
Without the leadership the Bank showed on June 24, 2016 when politics was in chaos, dire predictions of emergency budgets, currency market chaos, recession and surging joblessness might have come true.
Carney was well prepared, right down to the camera angles. The halving of the bank rate to 0.25pc was accompanied with a fresh round of quantitative easing and emergency assistance for a banking sector still fragile after the financial crisis.
What the experience of two summers ago shows is that in spite of Carney’s reputation as the ‘unreliable boyfriend’, when push comes to shove he can be decisive.
What the Governor and the Bank have failed to do is to get fully behind the UK’s recovery and take confident steps to normalise interest rates. This is not surprising. Were the UK going like a bomb – just like the American economy which recorded growth of 4.1pc in the second quarter of this year – raising interest rates from 0.5pc to 0.75pc and higher would be a no brainer.
Britain’s growth looks much less robust. As well as having to contend with the genuine uncertainty that has come with Brexit, the Bank’s interest rate setting committee has to contend with political noise.
Critics of Brexit and Theresa May highlight the threat to jobs of leaving the EU and complain that Britain has dropped to the bottom of the G7 growth league.
Here is a word of correction on both points. Yes, jobs might be in danger, but you wouldn’t know it from looking at the unemployment data. COMPANIES do not hoard labour for fun. The current rate of job creation, absorption of net immigration into the workforce and an unemployment rate of 4.2pc says the UK economy is far from moribund.
As for G7 growth league tables, that is a measure which dates back to crowing by George Osborne, when the UK pulled out of the post-crisis downturn more quickly than many of our competitors. But it now hangs around the UK’s neck like an anvil.
Economic cycles mean that even the weakest of economies will eventually recover. The UK’s growth in 2018, expected to come in at around 1.6pc, may be far from spectacular but we had our glory days a little earlier. There is much in the data from which to draw encouragement. This includes the return of retail sales, exportdriven order books for manufacturing and a services economy which is as robust and innovative as any in the world.
There comes a moment when the Bank returns to targeting inflation (currently above 2.4pc) and recognises that keeping rates too low for too long distorts.
Recent Office for National Statistics data showing normally cautious consumers are dipping into their savings to spend is an indictment of having left returns on thrift so low for so long.
The Bank’s Andy Haldane was the first insider to enter the rate increase camp. As chief economist and resident forward thinker, we have to take his flight among the hawks seriously.
With trade war dangers receding, banks starting to throw off money again, employment robust and the pound unsteady, the case for an August rate rise to 0.75pc this week – taking rates to their highest level since the financial crisis – is a sound one.