Carney’s big gamble is to reach out to the High St
MaRK Carney reached 100 days in office this week and it’s time for a report card.
Exceptionally good economic numbers in the uK bode well, but above-target inflation continues to be a nuisance for the Bank of England. Services are expanding, manufacturing is rebounding and the economy appears to have turned a corner, yet austerity still drags on growth, and wage inflation for the average worker is completely stagnant.
The real debate, of course, is whether the latest vogue in monetary policy and Carney’s signature approach – ‘forward guidance’ – is actually working. Central bankers such as Carney set out their plans months or years in advance so lenders and borrowers know what is coming and respond accordingly. at least, that is how it is supposed to work. The signal was that interest rates are not going to rise before late 2016.
listening to the crescendo from the City and financial markets on whether they believe Carney’s forward guidance policy, you’ll hear a roaring No.
Forward guidance was supposed to lower market expectations of interest rate rises. Instead, bond yields and the pound are rising like mad. By that measure, it has been a rather epic failure.
But judging Carney by his ability to take on the financial markets is entirely missing the point.
While the markets may not be listening, others have been more impressed – especially and most importantly house buyers. The uK housing renaissance is on its strongest trajectory in years with the help of numerous tailwinds: better economic activity, Funding for lending, Help to Buy, pent-up consumer demand, and so on.
Where market interest rates have crept up this summer, the cost of getting a mortgage to buy a new house has gone down. That is a powerful – and entirely intentional – fuel for the much-needed uK economic recovery. What Carney has done is enter a critical third phase of central bank monetary policy. let’s call it ‘verbal easing’.
With forward guidance as his mechanism, he is reaching over the heads of financial market participants to speak directly to the High Street.
This shift shows his determination to embed and further the recovery. Since the Bank introduced forward guidance in august, uK government bond yields (the rate the Government pays on its debt) has increased by half a per cent.
So what? The cost of government financing is still at historically low levels and over the same time period the cost of a mortgage for the average uK borrower has actually declined. This is the key.
ultimately, consumers represent around twothirds to three-quarters of the economy and if consumers feel more confident and resume borrowing then economic growth has a chance of becoming sustainable again. Don’t listen to the din from the City that insists Carney’s policies are being ignored – expect his direct route to the High Street and focus on consumers to continue unabated.
Is Carney making a deliberate ploy to strengthen confidence and directly reach consumers and business executives at the risk of markets’ credibility? Perhaps. We’ll have to wait more than 100 days for the ultimate verdict on his gamble.