We pay Mark Carney, the new Bank of England (BoE) governor, well over £800,000 a year. Is he worth it?
I don't want to jump the gun after all, his term has only just begun. But based on his first inflation report this week, I think we can safely say the answer is, well, probably not.
Carney's big idea is something called 'forward guidance'. We've been wondering with some interest whether this actually means more than it sounds like it means. But it looks like it doesn't.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Immediately after the press conference for the BoE Inflation Report, Carney was reported as having offered forward guidance (we are now certain this means the same as a forecast') that base rates in Britain won't rise above current levels until unemployment falls below 7% (ie, until around another 750,000 people get a job of some kind).
He also offered a bit of guidance (another forecast) that suggested 7% wouldn't be reached until the end of 2016 at the earliest. The idea is that knowing that interest rates will stay low for a good few years will help us all by giving banks the confidence to lend, and us the confidence to borrow.
That sounds good. But it isn't really much use. That's firstly because the collapse in bank lending in Britain hasn't been about confidence. It's been about solvency. Banks working on repairing their balance sheets don't increase net lending, regardless of what they might or might not know about interest rates. They can't. So, forward guidance only works when banks are solvent (as they were in Canada when Carney had so much success with it).
But Carney's great announcement is also of little use for the simple reason that it really is more guidance than promise. Not only can no one be sure when unemployment will fall, but even this came with a long, long list of caveats the main ones being that rates are also dependent on how inflation pans out and on "financial stability". Read that again.
Yup, this new policy is in part dependent on two factors we know for absolute certain the BoE has no control over whatsoever. It has no control over global financial stability so much so that a very good case can be made to suggest its pre-2007 interest-rate policy was more a cause of crisis than a contributor to stability. And its record on inflation forecasting has been almost uniquely hopeless over the last five years.
Interest-rate policy at the BoE is supposed to be tied to inflation. So, its (usually wrong) inflation forecasts were effectively the old forward guidance. If the new guidance is effectively hostage to the old guidance which has been a persistent failure it is beyond me why anyone thinks it is of any use at all.
Indeed, anyone who assumes it might be should note that even as Carney was making his non-promises about maybe keeping rates low as long as other stuff does kind of what he thinks it might, British market interest rates rose.
This is not a policy. It is a slightly desperate sounding expression of hope.
-
Rents rise at slowest pace for four years – is buy-to-let still worth it?Slowing rental growth and higher property taxes are creating a headache for landlords. Does buy-to-let still offer a good yield?
-
Should you bag a bargain with a half-price investment trust?Twenty-six investment trusts look cheap by historic standards, with some trading at a discount of more than 50%. Are they a bargain or value trap?
-
Inflation may be slipping but there is still plenty of misery aheadEditor's letter Inflation may be a little lower than last month as the prices of petrol and diesel fall back, but it remains structural and long-term, says Merryn Somerset Webb. And there are no painless solutions.
-
Beat the cost of living crisis – go on holidayEditor's letter As inflation rages, energy bills soar and the pound tanks, what’s a good way to save money this winter? Go on holiday, says Merryn Somerset Webb.
-
How capitalism has been undermined by poor governanceEditor's letter Capitalism’s “ruthless efficiency” has been undermined by poor governance, a lack of competition and central banks’ over-enthusiastic money printing, says Andrew Van Sickle.
-
The biggest change in the last 17 years – the death of the “Greenspan put”Editor's letter Since I joined MoneyWeek 17 years ago, says John Stepek, we’ve seen a global financial crisis, a eurozone sovereign debt crisis , several Chinese growth scares, a global pandemic, and a land war in Europe. But the biggest change is the death of the “Greenspan put”.
-
Things won't just return to normal – that's not how inflation worksEditor's letter You might think that, if inflation is indeed “transitory”, we just need to wait and everything will return to “normal”. But this is a grave misunderstanding of how inflation works, says John Stepek.
-
The public may have reached its limit for tax risesEditor's letter The UK tax burden is now at a 70-year high. And, while there may be some reason to hold off on cuts right now, taxes are too high because the state tries to do too much. Perhaps it should do less, says Merryn Somerset Webb.
-
Things may look bad – but they’re not that badEditor's letter The UK faces plenty of problems, says John Stepek. But things may not be as bad as they look. Our debt to GDP ratio is lower than many other major economies, and high employment means a healthy tax take. That gives the new chancellor room to cut taxes so people can keep more of their own money.
-
Car hire and the strangeness of the post-pandemic economyEditor's letter A global shortage of hire cars and unusually high hotel occupancy rates sum up the post-pandemic global economy in a nutshell, says Merryn Somerset Webb, with enhanced demand meeting restricted supply.
