Mixed signals from Carney
THE whole point of ‘forward guidance’, the flagship policy imported to this country from Canada by Mark Carney, is that it should bring clarity and reduce uncertainty on future interest rate rises.
There has always been a big problem at the heart of the concept.
If the message is too specific, in the sense of being pegged to a particular date or economic number, the Bank is liable to be caught out. If, on the other hand, the guidance is too vague, it risks being meaningless.
Credibility, an important commodity for any central banker, is on the line.
The initial formula put forward by Carney was that he would not consider raising interest rates until unemployment fell below 7pc, subject to a couple of other ‘knockout’ clauses.
The newly installed governor did not expect that to happen until 2016, but in the event the jobless figures fell far faster than anticipated. Good news for sure, but tricky in terms of the policy. In its original form, forward guidance was killed off in February, only months after it was launched.
Under the current incarnation, rate rises are linked to the notion of ‘spare capacity’ – in other words, borrowing costs are not supposed to go up until the economy is running close to full speed.
The concept of spare capacity is much fuzzier than unemployment numbers, making it harder for firms and households to take a clear view for their own financial planning purposes.
Matters have not been helped by Carney’s mixed messages.
Within the space of a few days he has giving out what seem like contradictory signals, first saying rates will go up sooner than markets expect, then arguing there is still plenty of spare capacity to be mopped up. Perhaps it is a new policy of quantitative teasing.
In Carney’s defence, it might be argued that when the data changes, a sensible governor changes his mind. But too many apparent Uturns within too short a time creates confusion and undermines credibility.
Central bankers have come a long way from the era when, under the influence of Alan Greenspan at the Fed, their pronouncements were deliberately gnomic.
These days the Bank tries to use communication as a policy tool to influence behaviour, so it would be ironic if people were just as mystified as ever.
The underlying difficulty is that there are forces pulling in opposite directions on rates. Soaring house prices in some parts of the country suggest rates need to start rising to avert the risk of dangerous asset bubbles. But the heavy indebtedness of many households and businesses, along with the strength of the pound that hampers exporters, indicate they need to stay lower for longer. Carney’s new mantra is that rate rises, whenever they come, will be ‘limited and gradual’. The question is whether that assurance will prove any more reliable than the previous guidance.
Held to account
THE introduction of an online comparison t ool f or current accounts, that will help customers pilot their way through the swamp of charges and find the best deal, is an excellent idea.
One major issue for the new challenger banks that are meant to boost competition in banking is that, while people do open secondary current accounts relatively readily, they remain wary about moving their main account.
Unless full portability is introduced, so that customers can move from one bank to another while keeping their sort code and account number, people are likely to remain reluctant to switch, due to the time taken and the near inevitable hassle of sorting out glitches. The banks are resistant to that idea, on the grounds of cost.
Making it easier for customers to see how their account shapes up against rivals will not solve the problem of current account lethargy, but it is a step in the right direction.
Checking out
THE exodus of senior directors at Tesco does not look good for its chief executive Phil Clarke.
Since he took the reins in 2011 there has been a procession to the door including Tesco bank chief Andrew Higginson, UK supremo Richard Brasher and finance director Laurie McIlwee.
The latest to depart is Neela Mukherjee, who has been in charge of general merchandise and whose departure was revealed just ahead of what promises to be a sticky shareholder meeting on Friday.
Clarke has the support of Sir Ian MacLaurin, his predecessor-butone, who has urged investors to give him more time to improve the grocer’s performance as it battles against the rampant discounters, Aldi and Lidl.
McLaurin has a point: the Tesco tanker cannot be turned around quickly. But unless there are signs of improvement soon, there will be a growing clamour from investors for one more executive exit.