News Column

Comment : Carney in a rates tussle he simply cannot win

January 25, 2014

George Kerevan

MARK Carney, governor of the Bank of England , moved swiftly after Wednesday's job figures - revealing, supposedly, the biggest quarterly drop in unemployment since records began in 1971 - to tell us the Bank would not be raising interest rates soon.Infact he usedaspeech yesterday to the global great and good gathered at Davos to hint (inthe Delphic code of central bankers) that interestrateswill be low for the next historical period."Eveninthe medium term, the level of interestratesnecessary to sustain low unemployment and price stability will be somewhat lower than before the crisis," he said.Actually,acloser reading of those employment figures suggests we shouldn't uncross our fingers yet.Remember, these numbers are compiled using an opinion poll withahuge margin of error. Half the new jobs are self-employed, while the giant fallinunemployment recordedinsome English regions (e.g. the Midlands ) bears no relationship to what is happening on the ground.The experimental monthly data series buriedinthe appendix even shows unemployment risinginNovember.Of course,Carneyand the Chancellor areinno rush to raise interestratesthis side of the 2015 General Election. However, contrary to the simplistic media view, real interests are setinthe market place, not Threadneedle Street .The Bank can pump extra liquidity into the banking system to make more credit available, which usually depressesrates. But if the market takes the hump, or thinksratesare going to rise anyway, neither the monetary policy committee nor the Chancellor can hold out against market sentiment.On Wednesday, when the new job figures were announced, the yield on ten-year British government bonds jumped to its highestineight years.This suggests the market is pricing in a rate rise by the end of this year and is ignoring Carney's "forward guidance" that low rates will prevail. Carney may say he doesn't need to raise rates because inflation is falling fast. But inflation is falling only because sterling is gaining strength, and foreigners are buying pounds because they expect higher interest rates in the UK . This is a tussle the Bank can't win.Iran makes oil offer to break West's embargoDAVOS also saw Iran's president, Hassan Rouhani , lob a diplomatic time bomb into the cosy global chatfest.Rouhani is desperate to reboot the ailing Iranian economy, which has virtually collapsed as a result of an unusually successful UN embargo aimed at curbing Tehran's nuclear ambitions.What Rouhani and his oil minister, Bijan Zanganeh , offered at Davos is a surprise: breaking the Opec oil cartel. Rouhani proposes a new international agency tasked with stabilising global oil prices. Tehran is ready to put "some" of its oil and gas reserves at the disposal of the body. This helps get sanctions lifted, which will provide Iran with access to investment to double its petroleum production.The implication for the West is that it would no longer have to placate Opec (read: Saudi Arabia, no friend of Iran ) to keep energy prices in check.The import of this offer has been lost amongst chat about defusing the Syrian crisis, but removing the oil embargo is a game changer.Reportedly, the Iranian delegation at Davos is engaged in heavy lobbying of executives from BP , ENI, and Total. There's no doubt now that Tehran is willing to deal.

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Source: Scotsman, The (Scotland)

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