Here’s more from the Sunday Times interview that Eamonn reported earlier and which marks the first anniversary of the launch of his forward guidance policy on interest rates
Wherever the finish line was in the depths of the crisis, we are much more than halfway towards that finish line now
The expansion is proceeding, momentum is more assured; the very fact we have had consistent quarters of growth in line with, or slightly better than, our forecasts shows that fact
We have to have the confidence that prospective real wages are going to be growing sustainably – we don’t have to wait for the fact of that turn to raise them
There are big pockets of households who will be very sensitive to interest rate increases when they begin, so it makes sense to be gradual
In terms of our broader message, and where the committee is united and has the same view, is that as the expansion continues, rates are going to go up.People might have different views on the exact timing, but it will happen and people should plan accordingly. Second, our best judgment of the path is that it will be limited and gradual, a new normal if you will.”
There are multiple headwinds for the British economy: a very weak Europe, the persistent strength of the pound, continued fiscal consolidation which will subtract from growth and British households that are still heavily indebted, not least because they haven’t seen real wages increase
In the interview Carney dismisses criticism that the first phase of forward guidance was an unnecessary innovation. Without it, he says, rates would have gone up too early.
If you look at the historic relationship between monetary policy and a recovery in activity, the MPC would have raised interest rates multiple times in the autumn of 2013
He also points out that reforms to Britain’s banks, which have forced them to hold more capital, mean the rates they charge businesses and households are likely to be higher than in the past, acting as a drag on the economy, even if Bank rate remains low. All this should mean that Bank rate will peak well below the levels of the past.
Delicately poised
I don’t see anything remarkable in these comments or too different from those previously.Overall Carney is still remaining cautious. The point about not needing to wait for actual wages growth just gives him a bit more room for manoeuvre should he need. Any knee jerk higher for the pound on the Asian open, given the market’s current appetite to feed from anything from the trough, is another rally-sell opportunity though IMHO
The BOE MPC Minutes coming up this Wednesday should tell us a little more
Full article here but only available on subscription, or try googling the title “Carney at the crossroads”
