A bloody good question

Mark Carney: deluded

I’m worried.

On Wednesday I watched the latest press conference by Bank of England governor, Mark Carney.

Right now, central banks are feeling almighty and powerful. None more so than the Bank of England.

I’ve said it before, and I’ll say it again: the control they assume they have is illusory.

Everything works fine on the way up. Central banks, with their unique ability to control the money supply can successfully rally economies.

But what central banks cannot do is keep markets from disintegrating. At some point, I know that’s going to happen. It’s inevitable.

Plus there’s the ever-present threat to every saver and investor; the pest that slowly but surely chews up your money, like a mouse nibbling away at a packet of biscuits in your cupboard until there’s nothing left: inflation.

So what did Mark Carney actually say in front of the world’s media on Wednesday?

“This economy is helping to lead the global recovery… the biggest challenge is to fully realise the potential of the BoE”.

Come again?  The UK is leading a global recovery?  And after years of bizarre monetary experiments like QE, what we actually need is more meddling by the central bank?

The man is deluded. And his delusions make him frighteningly complacent.

Let’s face it. In any ‘normal’ world, we would now be looking at interest rates going up.

The economy is really starting to move. The Bank is forecasting 3.4% growth in 2014. And house prices, as we all know, are rising dramatically.

But Carney indicated that interest rates won’t be going up any time soon.

As one astonished journalist asked “If 3.5% growth isn’t enough to start normalising rates, then what on earth is?”

Bloody good question.

Why you can’t trust Mark Carney’s inflation predictions

And what about the enemy of savers, investors and consumers – inflation?

Well, to help us with this question, Mark Carney has come up with a nice picture. It’s my favourite chart from the inflation report, and it perfectly illustrates the extent of the man’s delusions. Here it is:

140516-TRS01 The black line across the centre of the chart shows the Bank of England’s target for inflation: 2%. That’s pretty clear.

So where has inflation actually been over the past four years?  That’s the red line on the left hand side. As you can see, for the whole four-year period, except for the last quarter of 2013, it was way above the 2% target. Not such a great job there, then.

And where does Mark Carney now predict inflation will be? Well, that’s the pretty rose-coloured fan shape on the right hand side.

Mark Carney is 30% sure that inflation will be within the dark red area. And he’s 90% sure that inflation will fall inside the lighter red area. In other words, he thinks there’s only a 10% chance that inflation will fall outside the light red area.

Given where the red line on the left of the chart has been, compared to the target black line (2%), would you have much confidence in these predictions?

Me neither.

The Bank of England is completely ignoring reality.

The fact of the matter is, inflation looks like it has been tamed because global energy and commodity prices have stabilised. Plus, the pound has been surprisingly strong. A strong pound means cheaper imports, and hence lower inflation.

Is this a stable situation, which Mark Carney can feel comfortable about? Absolutely not.

Two big problems

First, we don’t have any control over global resource prices. Demand for resources is strengthening. We can’t rule out higher commodities prices.

Second, the very reason the pound has strengthened is off the back of a consumer-led credit recovery, a recovery that would normally give rise to higher rates. But if Carney won’t allow rates to rise, then why should the pound remain strong? Especially if something goes wrong with the economy.

Higher commodities prices plus a weak pound; that would equal serious inflation, and a lot of bites taken out of our wealth.

Mark Carney thinks everything is going in the right direction.

But as I say, I’m worried.

FREE daily investment email from MoneyWeek
Receive our thought-provoking investment email Money Morning every weekday morning, plus occasional promotions, & become a smarter investor.

Please enter a valid email address

To sign up, enter your email address:

  • the dibber

    You are completely right about the dangers of inflation. If the banks resume their normal money creation activities and/or the velocity of money circulation rises, inflation could return very quickly, and at much higher levels than we have seen in the past 6 years.
    We have little or no control over the cost of the majority of the commodities which determine the price of everyday goods, and neither does the Bank of England.

  • LuckyDave

    I would suggest that the word you should use for their power of control is delusional , not illusory. Until all MPs, senior civil servants, banking employees including Carney are on defined contribution as opposed to defined benefit pensions, the economy will continue to be out of control. If their own prospects were affected by their actions, they would take a lot more care about their recommendations and actions. Because they are protected from their incompetence, they will not address the real issues. I am sorry to say, but the next economic crisis is just around the corner, since the people managing it have no skin in the game.

  • DrD

    For my 2 pence worth. I don’t think high inflation is likely, I think it’s inevitable. Trouble is they’ve let the genie out of the bottle, so next time there is a hint of a recession, or a stock market fall they won’t hesitate to take the easy option and do more QE. Any sort of discipline has gone, they’re too busy patting their own backs. As we all know, the bigger the pride, the harder the fall!

  • Alec

    Carney is the poodle in the pocket of Cameron and Osborne and he will do as he is told right up to the election in 11 months’ time. So the market will continue to be rigged regardless of the BoE’s pathetic utterances regarding the property market which everyone knows is totally out of control.

MoneyWeek magazine

Latest issue:

Magazine cover
Prime location

The best property buys in the eurozone

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.

22 May 1980: Pac-Man hits the arcades

It didn't take long for Pac-Man, or Puck Man as it was originally called in Japan, to become a worldwide craze after it was released on this day in 1980.

The Kids' Portfolio: the four best funds to buy for your children

Investing for your children's long-term future is an excellent idea. But what should you buy? The Kids' Portfolio is a simple collection of four funds intended to be tucked away for 20 to 40 years.