Carney tries to bring clarity

The new Bank of England governor has spelled out the details of his 'forward guidance' policy. Will he come to regret it?

New Bank of England governor Mark Carney has only been in the job for a month, but he is already making his intentions plain to shake up the Old Lady of Threadneedle Street. On Wednesday he unveiled a policy of "forward guidance", which boils down to keeping interest rates very low and quantitative easing going until unemployment is under 7%.

What the commentators said

Carney was unequivocally saying that he expects interest rates to be held at current record low rates until 2016 at the earliest and wants us to act on that basis. Yet Carney's choice of 7% unemployment for rates to rise shows just how weak the bank believes the economy is. After all, the current rate is not too far above that, at 7.8%, said Capital Economics. Implying that it will take at least three years to close the gap signals that policymakers see a good deal of spare capacity and scope for productivity growth in the economy.

Notably, the announcement comes at a time when economic news has been good: manufacturing, services and consumer spending all proved stronger than expected, implying GDP growth is accelerating further from a good rate in the second quarter. Either the bank is uncertain that momentum will be maintained or it believes it's vital to reassure markets that rates won't rise too quickly and risk choking off the recovery.

The fact that such second-guessing has already begun also indicates a flaw in the proposal. "This means that the markets will be poring over the monthly unemployment numbers, and will grapple with such thorny issues as whether a better economic outlook draws discouraged citizens into seeking jobs, and thus pushes the unemployment rate back up," noted Buttonwood on Economist.com.

"It also raises the regular prospect of markets selling off when unemployment falls; a development that will further widen the comprehension gap between ordinary workers and the financial sector." Given that, Carney's big idea may prove less helpful than he hopes.

Recommended

Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Bad data is driving fear of a second wave of Covid-19
UK Economy

Bad data is driving fear of a second wave of Covid-19

The recent spike in Covid-19 “cases” is very different to the original outbreak, says James Ferguson of MacroStrategy Partnership. The government need…
18 Sep 2020
Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
Are we losing the moral high ground on Covid?
UK Economy

Are we losing the moral high ground on Covid?

Not only must we never see more than five other people at the same time, we must report those who do to the police, says Merryn Somerset Webb.
17 Sep 2020

Most Popular

Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
Central banks want politicians to take charge – but what will they do?
US Economy

Central banks want politicians to take charge – but what will they do?

The US Federal Reserve has come to the end of the road in terms of what it can do to accelerate any recovery, says John Stepek. It's over to the polit…
17 Sep 2020
IAG's share price is ready for take-off - here's how to play it
Trading

IAG's share price is ready for take-off - here's how to play it

The owner of British Airways has had a turbulent year, but is now worth a punt. Matthew Partridge explains the best way to play it.
8 Sep 2020