Merryn's Blog

The Bank’s new emperor has no clothes

Everyone is making a big fuss over nothing - Mark Carney’s ‘revolution’ is nothing of the sort.

I've tried, but I just don't get it. I can't see how Mark Carney's big announcement yesterday is a revolution in monetary policy.

Look at the headlines and you might think something big had changed. According to them, Carney has said that interest rates in the UK will not rise until unemployment has fallen to 7%, and that, says Carney, will not be until 2016. So we can all keep borrowing as much money as we like for years to come, in the happy knowledge that we won't get stuck with the kind of interest bills a free market might give us.

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But this isn't really what Carney said. What he actually said was two things.

The first was that the UK has now got a temporary (haha...) inflation target of 2.5%, rather than the previous 2%. This should be of very little interest to anyone, for the simple reason that the old target was clearly abandoned long, long ago. This one probably will be too. See John's Money Morning for why this is.

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The second thing he said is that whatever he said about employment didn't mean anything. As Peter Warburton of Economic Perspectives notes, while it might look like Carney delivered a "clearly defined framework" of guidance on interest rates, his full statement is really made up of nothing but "confusion and chaos".

There are "knock out" clauses relating to inflation, inflation expectations and instability. But we already know the first of these is meaningless, and Carney has given no real parameters for the second two (presumably for the reasons John outlines). So they offer nothing for us to base our expectations on.

But even if they did offer parameters, it wouldn't be much good because in the end it turns out that the 7% and the knock outs aren't absolutes. They are just "way stations", at which the Bank's Monetary Policy Committee will think (or not) again. The real guidance here is that anything could happen*. Look at the details, and this is surely the biggest naked emperor of a policy the financial crisis has seen so far.

* Although given the overwhelming need (from the government's point of view) for financial repression to continue that anything' is likely to be a continuation of negative real interest rates, alongside a long list of excuses from Carney as to why high inflation and/or low unemployment doesn't mean rates should rise. A few years ago no one really got this. Now most people do: a recent survey showed that 60% of us now understand that our cash savings will lose value over the next year.




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