Don’t listen to Mark Carney’s ‘forward guidance’

Mark Carney doesn’t control the economy

If Mark Carney has proved anything in his tenure at the Bank of England, it’s that ‘forward guidance’ is a load of baloney.

When Carney took over our central bank back in 2013, it was printing money (AKA quantitative easing). But markets were feeling tetchy about this money printing coming to an end.

To calm nerves, Carney promised low, low interest rates as far as the eye could see.  The Bank called this ‘forward guidance’.

You may have heard this term before. You might even listen to it. Today, I’m going to show you why you should never, ever do that.

Let’s start by seeing what happened to Carney’s promise of super-low interest rates for years to come.

That didn’t last long

Well, Carney’s promise worked a treat at first. When quantitative easing did end, everyone took it very well – after all, forward guidance meant loose policy would persist.

Many were foolhardy enough to go out and borrow to the hilt.

And why not? The Bank told them rates would stay low for, most were guessing, three or five years.

So what a surprise it was for many people, to learn that rates will be rising sooner than expected.

That’s right, the timetable has been brought forward! The Bank now promises that its lending rate will normalise at about 2.5%, and that this will be the ‘new norm’.

Hold on a second. What about that forward guidance?

Oh, don’t you worry about that, says the Bank of England. We’ll just change our guidance.

More baloney from the bank

Spare a thought for the poor suckers that have been hooked by this.

Figures released last week show that the people most at risk at Carney’s advice – today’s young, upwardly-mobile lot – have already taken a massive whack from his guidance.

According to the Office for National Statistics, 28-year-olds have been smashed, not only because they’re indebted and face rising interest rates, but because their salaries are in outright deflation too.

During the last four years, salaries for this age group have shrunk by an astounding 18%. How on earth can this turn out well?

There’s a fantastic amount of competition for jobs – especially in the unskilled sector – and zero hours contracts, competition from migration and a general lack of work-based skill are all dragging down wages.

And despite all the evidence that we’re building a Ponzi scheme of debt, the Bank of England continues to grandstand its own delusions.

Who are they fooling?

Young borrowers on a mortgage are probably paying something between 2% and 5% on their mortgage right now. As for other credit, even if you’re financially stable, it’s probably costing you around 10%.

Let’s say Carney can magically maintain the 2.5% rate target – that’s up from 0.5% today.

Many borrowers think that, because the central bank rate has gone up 2%, so will the rate of interest they pay on borrowings.

Wrong. Both mortgages and unsecured rates could double. And frankly, if the financial markets hit the skids again, borrowers’ rates could go up considerably more.

Worse, if the pound hits the skids, or inflation ignites and the central bank needs to take affirmative action, things could get even bleaker.

The central bank can’t control an economy and therefore doesn’t hold absolute power of interest rates. They certainly don’t have the capacity to give meaningful forward guidance.

What’s the point then?

Forward guidance is a bit like listening to the forecast of how well a die-hard football fan’s team will do this year. It’s really a forecast of where the Bank of England would like the economy to be.

And that’s why you should never, ever listen to it.

What they’re doing is continuing to lull the over-borrowed into a false sense of security. The truth is, forward guidance cannot work.

Nobody can divine the future – least of all the Bank of England.

Nobody knows how high rates will have to go. Nor indeed, the timing.

If I were a borrower (which I’m not), I’d be using current low rates to pay down debt. I would not be doing what the Bank of England wants you to do – that is keep building debt on the basis that low rates are the new norm.

The fact is, there is no ‘new norm’. Just a new lot of central bankers making implausible forecasts about a future they know nothing about.

Let’s enjoy the good times while they last.

This article is taken from our FREE daily investment email, The Right Side
The Right Side is our FREE contrarian investment email delivered every Monday, Wednesday and Friday. It cuts through market noise to deliver useful, shrewd, and to-the-point advice – straight to your inbox. Please enter a valid email address

To sign up, enter your email address:

Information in The Right Side is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Right Side is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234.

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

  • bhoyedup

    When I read the forward guidance from Carney he clearly qualified it with conditions on employment levels and economic growth, both of which have improved sooner than expected. Are we complaining he was too pessimistic as a BoE Governor?

  • Indibindi

    Since hotly tipping HRT Participacoes em Petroleo GDR several times and with a MoneyWeek article entitled “This Stock Looks Like a Steal” with its first line “Today I want to recommend that you buy a hugely exciting oil stock”, the share price has collapsed 80%. I have therefore lost 80% of the CAD 15000 that I invested as things stand. I am (perhaps wrongly) a patient type of person, so I have waited for a long time for feedback from Bengt regarding how this has come to pass after his very strong recommendations to buy and what the prospects are now for the value of HRT Participacoes. I note that others have asked the same questions of Bengt, but I can see no response. So Bengt, please would you now respond to these two quite legitimate questions following your black and white recommendation to invest in this company. I look forward to seeing this here in the next few days. Thanks in advance.

  • braddexter

    Bengt Saelensminde…. boy does this guy talk some rubbish. From his style, I think his background must be the the Daily Mail.
    1. It’s been obvious for quite a while that interest rates would go up sooner rather than later.
    2. Borrowers knew that rates would go up…. anyone who borrowed without taking this into account when working out how much they could afford to repay was stupid
    3. Savers were never given any choices. They just lost 80% of their income.

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.

26 March 1885: The Cremation Society performs Britain's first legal cremation

On this day in 1885, poet Janet Pickersgill became the first person to be officially cremated in Britain, at Woking Crematorium in Surrey.