New Bod, Old Tricks

09/08/2013 at 5:17 pm

The eagerly-anticipated arrival of Mr Mark Carney as new Governor of the Bank of England apparently produced its first real news this week. Presiding over the regular release of the Bank’s quarterly Inflation Report on Wednesday, Governor Carney announced that UK interest rates will not start going up until the ILO measure of unemployment falls to 7%. This measure has not moved much over the last four years, stuck around an average of 8%, so who is to say when this might happen? But not to worry: the condition is subject to three “knockouts”, which are in fact two. If inflation looks like it might be getting troublesome, then rates might go up. And if the financial system looks like it is imploding due to the low level of interest rates – how this might occur is yet to be clarified – then a change will also be considered.

This generated some coverage, though market reaction was understandably confused. The pound rose somewhat, trade weighted sterling bouncing back to about what it averaged in June. On the other hand stocks fell, with the FTSE 100 falling by 93 points on the day. Meanwhile, gilts bobbled around a bit before finally deciding to do nothing at all.

For the benefit of readers however, this blog can state that there is one new development of note: namely, that the supposed commitment to a 2% CPI target over a 2-year forecast horizon has been effectively abandoned. Its replacement is a supposed commitment to a 2.5% CPI target over a 1.5-2 year forecast horizon (“knockout” number one).

Nobody seems to have noticed this usurpation of the Exchequer but it doesn’t matter anyway. The Bank’s inflation forecasts have been garbage for years. They have consistently underestimated CPI over their forecast period in good times and bad while doing everything they can to drive it higher.

From the volume of comment in the business pages one might find this hard to believe. But it is August, they have to have something to write about and it is true: other than this one change nothing is different. The first paragraph of all the Inflation Reports since February 2004, when CPI took the limelight from RPIX, has read along these lines:

In order to maintain price stability, the Government has set the Bank’s Monetary Policy Committee (MPC) a target for the annual inflation rate of the Consumer Prices Index of 2%. Subject to that, the MPC is also required to support the Government’s economic policy, including its objectives for growth and employment.

Mr Carney’s predecessor was explicitly prioritizing this supposedly secondary aim as far back as January 2011. The emphasis is not new. In fact even the soft target for unemployment is a poor show compared with targeting nominal GDP growth, as some had been hoping Carney would do.

In other words the Bank will carry on ignoring inflation and doing everything it can to push up activity and job numbers (beyond what it has already done: not much).

We must be fair to Mark Carney. As well as presiding over monetary policy he also has a firm to run, and has let it be known that he wants more women at the top of the Old Lady, with a view to one of them becoming Governor in the fullness of time. He is likely to be pre-empted in this ambition by the Fed if recent speculation is to be believed, but then they were the first ones to start linking monetary tightening to specific unemployment figures too so this cannot bother him.

In any event, his legacy is unlikely to be overshadowed by that of the newly-ennobled Mervyn King. All those years at the helm and the only prices he managed to contain were those of the sandwiches in the Bank’s canteen.

Whether Mr Carney manages any better on the inflationary front remains to be seen. The early signs are not encouraging.

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