One thing became clear pretty soon into Mark Carney’s big speech today: the Bank of England Governor is much better when he ad-libs than when he reads from the script. The speech was a bit dry, a touch monotonous, and full of central-bankerese; but when it came time for questions from the floor, the Governor’s wisecracks had the audience here at Nottingham laughing and applauding – if not quite rolling in the aisles.
His response to one query about the future direction of interest rates (always a dangerous topic for central bankers) had something of the Groucho Marx about it: “Some are going to go up and others are going to go down.”
When a Citigroup economist asked a question, he asked: “Have you moved up here Michael?” before encouraging the audience of local businessfolk to pester him for a loan. Apparently wisecracks like this are a Carney stock-in-trade.
But the jokes serve an important function, beyond generating laughs: they usually kick in when he is trying to avoid answering the question.
Central bankers are paid to be enigmatic, not to give too much away. The problem is that Carney has been so enigmatic in his first couple of months in the job that markets, in particular, are finding it fiendishly difficult to judge him. His forward guidance policy, which many expected to usher in a new era of low interest rates, has, in fact, pushed the cost of borrowing (the real one in the markets rather than the rates the Bank itself sets) higher – not lower.
The issue is not the simple pledge at the policy’s heart – that the Bank will not consider raising rates until unemployment drops below 7%. It’s that traders are convinced this will happen sooner than the Bank is forecasting.
In one sense this is a “good news” story: another sign that the economy is healing faster than expected. The problem is that higher market interest rates feed, in turn, into the cost of personal loans and mortgages – though, as the Governor was keen to emphasise today – not all of them.
“Movements in longer-term market interest rates are certainly relevant,” he said in one important part of the speech, “but what matters most to you is what actually happens to Bank Rate, now and in the future. That is because the interest rates on 70% of loans to households and more than 50% of loans to businesses are linked to Bank Rate.
“And it is the Bank of England that controls that rate,” he added, perhaps a touch unnecessarily. It wasn’t the only part of the speech that gave the impression of protesting a touch too much: one section emphasised that Britain’s interest rates should not be unduly determined by those of the Federal Reserve in the United States.
When one discounts the central-bankerese, one does get the sense that Carney is slightly frustrated: frustrated that his landmark policy has been depicted (by traders) as a flop; frustrated that the Fed seems to have more leverage over UK interests than the Bank; frustrated that the Bank has been painted as powerless in the face of these forces. It isn’t the honeymoon he might have imagined when he took office.
However, in large part this owes itself to his own mixed messages. He has committed himself to low interest rates, but has inserted so many provisos that no-one quite believes him. He is pledging to loosen restrictions on banks, but, at the same time, promising to clamp down on mortgage lending if it gets out of hand.
In one sense, that’s pretty typical central banker behaviour – so what’s the problem? I suppose, that some in the markets expected Carney to blaze into Threadneedle Street all guns blazing and restart the UK economy with a monetary blitz the likes of which we’ve never seen before. That was clearly unrealistic – but then that’s markets for you.