Now the following may seem a little pedantic, but in the world of central banking, where small smoke signals are everything, it’s significant.
A few weeks ago I asked Mark Carney a pretty simple question at the Inflation Report press conference (transcript here [pdf]): “You’ve said repeatedly that you feel that the next move is likely to be up rather than down. Do you still stand by that?”
He gave a pretty simple reply: “Absolutely. The whole MPC stands by that.”
I have to say I was a little surprised at the straightforwardness of his response. After all, at the time of that press conference markets were pricing in a one-third probability of an interest rate cut in the coming year. Indeed, investors were putting a greater chance on that than on a cut. So I found it a little odd that he could be so sure. But that’s what he said.
Roll on two and a half weeks to today and the Governor’s appearance at the Treasury Select Committee. Watch the following exchange between Rachel Reeves and Mr Carney:
In case you missed that, when asked how he could be so sure about the next move being up rather than down, he said: “I think we should be clear about what that statement says. Over the forecast horizon interest rates are more likely than not to increase.”
The more eagle-eyed among you will realise this is quite different from saying the next move will be up rather than down – as he explicitly confirmed at the start of the month.
Now you may well think I’m being a bit pernickity (guilty, as ever), but the shift of tone is an important smoke signal.
Just look at how expectations for future moves in interest rates have shifted in recent years. In the chart below you can see what investors were pricing in for bank rate each January all the way back to 2009. You can see how each year they expected rates to rise not long afterwards. Each year, they were wrong.
Now look at the final line on the far right – that’s from February 11th – in other words just over a week ago. At that stage, markets were fully pricing in a cut in interest rates by the turn of the year, and still expected rates to be below 1% by 2021. This is staggering stuff – but then monetary policy is deep inside the twilight zone.