The fallout of the past few days following the unveiling of Britain’s forward guidance policy calls to mind something a senior policymaker whispered to me shortly after Mark Carney was appointed.
“Don’t forget,” this person said mischievously, “when push comes to shove he’s still a central banker.”
The point being that hope as some might that Carney would unleash a one-way torrent of printed money at the British economy, his natural instincts would, at heart, be rather more cautious. Say what you like about them, central bankers are inherently less likely to throw caution to the wind than politicians and, arguably, commercial bankers.
And so it has proven. The version of forward guidance the Bank of England committed to on Wednesday is riddled with get-out clauses – so many of them that having got briefly excited when the headlines came out at the press conference, markets swiftly reversed their earlier enthusiasm shortly after reading the small print. By the end of the day they were anticipating that interest rates would rise even sooner than they thought before Mark Carney unveiled forward guidance.
On the face of it this seems to suggest, as the FT reported this morning, that forward guidance has “backfired”. And those get-outs (or knockouts as the newly-Transatlantic-accented Bank has termed them) have certainly caused a touch of concern among analysts. The inflation knockout of 2.5% a year and a half hence is not far from the 2.4% in the Bank’s current forecast, for one thing. And then there’s the threshold for unemployment which at 7% is higher than the 6.5% the Bank guesses is the structural medium-term unemployment rate. Many investors had hoped that this would be the magic threshold number – and some suspect this threshold might be reached sooner than the late 2016 point the Bank is forecasting.
And the Governor himself sounded a touch more dovish than expected at the press conference on Wednesday morning. When asked about the prospect of more quantitative easing (remember the MPC was split on whether to do more only a few months ago) he dismissed it pretty much out of hand.
And it’s a combination of these concerns that probably explains the market reaction on Wednesday afternoon, which hasn’t been entirely reversed in the following days. I asked the new Governor about this in our interview on Wednesday afternoon and he insisted that he wasn’t concerned, calling the move in markets “marginal”, adding that those expectations of interest rate hikes had come forward only a few months.
But then again Mark Carney is a central banker, as we’ve established, and central bankers rarely like to show they are cowed by the markets.
I gather that other senior Bank directors who gave a private briefing to city economists on Wednesday afternoon also tried to put a brave face on it, pointing out that this was likely to be profit-taking more than anything else – after all, the big move in markets had come after Carney’s first MPC meeting, at which the Bank’s statement hinted that it was likely to adopt forward guidance.
And pretend though it might that this is not an issue, there is no doubt Threadneedle Street is a little worried about the lukewarm reception of the new policy. After all, the entire point of forward guidance is to bypass the City and send the message to consumers that interest rates aren’t going up anytime soon. But while a few front pages had something of that message on Thursday, it wasn’t anything like as clear as it could have been.
In the end, this is all about trying to shape consumers and businesses’ expectations: to encourage them to go out and spend today rather than tomorrow. That demands a very strong message; and it’s not clear that what we saw on Wednesday was quite strong enough. And we probably shouldn’t be surprised: central bankers always like to leave themselves get-out clauses.
But I wouldn’t be surprised if Mark Carney’s messaging in the coming weeks is even clearer, more straightforward and more dovish than he sounded on Wednesday. He might point out, for instance, that picking the 7% threshold was actually less hawkish than it might have looked. (If he were to pick 6.5% he would be accused of being behind the curve – after all, the threshold doesn’t trigger an automatic rate hike: it’s merely the moment the MPC is entitled to start thinking about lifting borrowing costs.)
He might underline the fact that the Bank still has other stimulatory tools at its disposal. In short, I suspect he will grit his central banker teeth and do whatever he can to get the message across that interest rates aren’t going up anytime soon. Whatever the markets think.
PS Blogging is going to be light in the coming weeks as I’ll be spending a bit of time working on this.