Carney’s interest rate kerfuffle

Mark Carney's hints at a sooner-than-expected rate rise has caused a stir among investors.

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.

"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.

696_Markets

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".

Recommended

Budget 2021: Here is what Chancellor Rishi Sunak announced
Budget

Budget 2021: Here is what Chancellor Rishi Sunak announced

Rishi Sunak delivered his much anticipated Budget today. David Prosser explains what it means for you.
27 Oct 2021
What does Rishi Sunak have in store for investors this Wednesday?
Budget

What does Rishi Sunak have in store for investors this Wednesday?

Rishi Sunak is unveiling his spending plans for the economy this week. John Stepek analyses areas which may be most hit by the budget.
25 Oct 2021
Why we should scrap the Budget
Budget

Why we should scrap the Budget

The yearly Budget, big set-piece of British politics, encourages the very worst from the government, says Matthew Lynn.
24 Oct 2021
Why fed-up workers are quitting their jobs
Economy

Why fed-up workers are quitting their jobs

Workers are leaving their jobs at an astonishing rate, especially in the US, leading to a shortage of workers. What will that mean for our economies? …
22 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021