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

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
A beginner’s guide to inflation – everything you need tko know
Inflation

A beginner’s guide to inflation – everything you need tko know

One of the most frequently mentioned topics in the news these days is inflation. But what exactly is inflation and how does it affect the economy and …
18 Jan 2021
Why the City should create a single financial market with the Swiss
Economy

Why the City should create a single financial market with the Swiss

A tie-up between London and Zurich, two global financial centres, could pay huge dividends for both, says Matthew Lynn.
17 Jan 2021
How to make sure your business doesn't lose out in lockdown
Small business

How to make sure your business doesn't lose out in lockdown

Money is still available via government schemes to help small companies cope with the latest Covid restrictions. David Prosser outlines what you can g…
16 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
It's not just the UK – we're seeing pandemic housing booms across the globe
Property

It's not just the UK – we're seeing pandemic housing booms across the globe

Soaring house prices aren’t just a UK thing, they’re a worldwide phenomenon. And it’s no coincidence – the underlying cause is much the same. John Ste…
18 Jan 2021