News Column

Business analysis: Bank of England: Carney's interest-rate statements are confusing us all, says Larry Elliott

August 19, 2014

Larry Elliott

A period of silence on your part would be welcome. That was Clement Attlee's putdown to Harold Laski in 1946 when the postwar premier thought the chairman of the Labour party was speaking out of turn. Increasingly, the financial markets would like someone to repeat that message to Mark Carney, governor of the Bank of England.

The latest in a series of seemingly conflicting statements emerged from the Bank governor in an interview with the Sunday Times. Just days after delivering what the City took to be a "doveish" quarterly inflation report, Carney told the paper that the Bank might raise interest rates before growth in earnings caught up with inflation.

That prompted speculation of an earlier rise in borrowing costs than the markets had been expecting and was enough to send the pound up on the foreign exchanges.

Carney has form for this sort of thing. The previous inflation report in May was seen as ruling out a rate rise before 2015, but in his annual Mansion House speech a few weeks later, the governor said markets should take the possibility of a 2014 increase more seriously.

It is possible Carney is keeping the markets guessing because the Bank itself is unclear about the real state of the economy. Threadneedle Street has been surprised by the strength of growth and the weakness of pay over the past 12 months.

A second possibility is that Carney's hint that rates could go up even while real incomes are still being squeezed is meant to forewarn the markets that the minutes of the August meeting of the Bank's monetary policy committee, out tomorrow, will show at least one policymaker voting for dearer borrowing. It was clear from the inflation report that there is division on the MPC about the amount of spare capacity in the economy and the rate at which that slack is being used up.

That is the best gloss that can be put on the governor's latest pronouncement.

It would now be a real surprise - and a blow to Carney's credibility - were the minutes to show a 9-0 vote in favour of keeping borrowing costs unchanged. Why? Because a split vote would mean that the governor was putting the markets on notice for a hawkish set of minutes. A unanimous vote would give the unfortunate impression that he is making it up as he goes along.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Guardian (UK)

Story Tools Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters