Bank of England governor Mark Carney gave investors a jolt last week by saying that interest rates could rise "sooner than markets currently expect".
In response, interest-rate expectations soared, with the first rise from the current record low of 0.5% now pencilled in for late 2014, compared to the previous estimate of April 2015.
Trade-weighted sterling, measured against a basket of major trading partners' currencies, jumped to a new post-crisis high.
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"For all the headlines and histrionics," says Liam Halligan in The Sunday Telegraph, there was more to the speech than the half-sentence that caused the "frenzy of speculation". In fact,Carney's remarks were "heavily qualified".
He mentioned that the Bank's estimate of the spare capacity in the economy the extent to which growth can continue without sparking inflation is 1%-1.5% of GDP.
What's more, the bank thinks that the rate at which the economic "slack" in the system is being used up will slow in the second half of the year. All this would tend to point to a rate rise later rather than sooner.
In any case, says Halligan, investors should remember that Carney's previous attempts at guiding market expectations have hardly been an unqualified success. His forward-guidance policy was designed to provide reassurance about the path of interest rates, but just ended up causing confusion.
The upshot? We don't know when rates will rise; we merely know, given our huge debt load, that they are likely to impose "serious pain".
Carney's "forecasting abilities make Michael Fish look bang on", as Alistair Osborne puts it in The Times. But he's "in good company". Four months before the subprime disaster exploded, for instance, former US Federal Reserve chairman Ben Bernanke said subprime problems were likely to be contained. Given that, it's mystifying that markets still seem to hang on central bankers' every word.
Former Fed chairman Alan Greenspan admitted last year that "we really can't forecast all that well, and yet we pretend we can, but we really can't". That, as Osborne concludes, is the"truest thing he ever said".
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Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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