We pay Mark Carney, the new Bank of England (BoE) governor, well over £800,000 a year. Is he worth it?
I don’t want to jump the gun – after all, his term has only just begun. But based on his first inflation report this week, I think we can safely say the answer is, well, probably not.
Carney’s big idea is something called ‘forward guidance’. We’ve been wondering with some interest whether this actually means more than it sounds like it means. But it looks like it doesn’t.
Immediately after the press conference for the BoE Inflation Report, Carney was reported as having offered forward guidance (we are now certain this means the same as ‘a forecast’) that base rates in Britain won’t rise above current levels until unemployment falls below 7% (ie, until around another 750,000 people get a job of some kind).
He also offered a bit of guidance (another forecast) that suggested 7% wouldn’t be reached until the end of 2016 at the earliest. The idea is that knowing that interest rates will stay low for a good few years will help us all by giving banks the confidence to lend, and us the confidence to borrow.
That sounds good. But it isn’t really much use. That’s firstly because the collapse in bank lending in Britain hasn’t been about confidence. It’s been about solvency. Banks working on repairing their balance sheets don’t increase net lending, regardless of what they might or might not know about interest rates. They can’t. So, forward guidance only works when banks are solvent (as they were in Canada when Carney had so much success with it).
But Carney’s great announcement is also of little use for the simple reason that it really is more guidance than promise. Not only can no one be sure when unemployment will fall, but even this came with a long, long list of caveats – the main ones being that rates are also dependent on how inflation pans out and on “financial stability”. Read that again.
Yup, this new policy is in part dependent on two factors we know for absolute certain the BoE has no control over whatsoever. It has no control over global financial stability – so much so that a very good case can be made to suggest its pre-2007 interest-rate policy was more a cause of crisis than a contributor to stability. And its record on inflation forecasting has been almost uniquely hopeless over the last five years.
Interest-rate policy at the BoE is supposed to be tied to inflation. So, its (usually wrong) inflation forecasts were effectively the old forward guidance. If the new guidance is effectively hostage to the old guidance – which has been a persistent failure – it is beyond me why anyone thinks it is of any use at all.
Indeed, anyone who assumes it might be should note that even as Carney was making his non-promises about maybe keeping rates low as long as other stuff does kind of what he thinks it might, British market interest rates rose.
This is not a policy. It is a slightly desperate sounding expression of hope.