News Column

Interest rates: Forward guidance? Carney has left the City baffled, says Larry Elliott

June 25, 2014

Larry Elliott



It's hard to fault Andrew Tyrie's take on Mark Carney's attempts over the past six weeks to explain the Bank of England's approach to interest-rate increases. We've had quite a lot of guidance, the chairman of the Commons Treasury committee said drily, not all of it consistent.

Predictably, the governor insisted that there had been no flip-flopping. Threadneedle Street's monetary policy committee had been consistent in its approach.

Consistent? Really? Are we talking about the same Bank? Yes, we are. The one that used its May inflation report to point out that there was spare capacity in the economy that needed to be used up before borrowing costs were raised. The one that since Carney's Mansion House speech just 29 days later has been sending out the message that rates might go up sooner than markets think. And the one, judging by Carney's evidence to the Treasury committee, that is now back to pointing out how nugatory real earnings growth is a sign of slack in the labour market.

What is clear is that Carney and his fellow MPC members have left the City entirely baffled. What's also clear is that what happens to official interest rates is now entirely dependent on the incoming economic data. This is a recipe for volatility, precisely the opposite of the Bank's avowed policy.

Indeed, as the first anniversary of Carney's arrival at the Bank nears, his main policy initiative - forward guidance - lies dead in the water. In truth he has turned the clock back to the days when the MPC's approach was to assume that the future was unknowable and that the interest-rate decision had to be judged afresh each month.

So what, then, is the difference between monetary policy under Mervyn King and monetary policy under Mark Carney? Apart from the bigger salary and the Canadian accent, not a great deal, it would appear. In the sporting metaphors beloved by both men, they take each game as it comes.



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Source: Guardian (UK)


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