When Mark Carney arrived in Threadneedle Street in 2013 he brought with him his policy of “forward guidance”. As governor of the Bank of England he would, he said, endeavour to signal his thinking on interest rates and not spring surprises. But economists are far from perfect at predicting the future and the BoE’s crystal ball has been cloudy. Unable to see far into the future, it has had to react to the evidence with which it is presented. On occasion, therefore, it has given advance signalling of one course only to take another.
This year, for example, the signal was to expect what would have been only the second rate rise since 2008. It didn’t happen. The economic data simply did not justify it. The latest indications have been that the increase had merely been postponed and would come in August. Yet the arguments to justify a rise are still far from clear and it would be perverse were the BoE to raise rates simply to honour the City’s conviction that, this time, it will deliver on its guidance.
Hawks argue it is time for the central bank to start edging the interest rate up from the lowly 0.5 per cent where it languishes to a more “normal” level, closer to the 5 per cent at which it stood before the financial crisis caused havoc in 2008.
But these are not normal times. Even if the economy were thriving, which it is not, the imminent risks are exceptional. The biggest is Brexit. Not even the British prime minister knows what Brexit may mean, although she now has an imaginative wishlist of what she might like. Any version, however, will hit the economy and the damage is already under way. This week’s announcement from Deutsche Bank that it is moving “a large part” of its derivatives trading from London to Frankfurt is part of the trend. Uncertainty about Brexit is discouraging business from investing, hence productivity remains low: output per hour fell by 0.5 per cent in the first quarter.
Then there is the prospect of US president Donald Trump’s trade wars putting the brakes on global growth. Mr Carney has conceded that the threatened tariffs could hit jobs, growth and stability around the world. That warning should inform the deliberations of the Monetary Policy Committee as members ponder whether now is the time to begin to impose a brake on the UK economy.
It is hardly soaring away at the moment. From a miserable 0.2 per cent growth in the first quarter, economists estimate it is likely to have reached 0.4 per cent in the three months to June. That is an estimate, though. The latest figures from the motor industry, for instance, show that car production was down 5.5 per cent in June.
For many families in the UK, household economies remain deeply depressed. The poorest 10 per cent of households spent two-and-a-half times their disposable income last year, according to the Office for National Statistics. Some may be splurging for luxuries on credit cards, but charities such as StepChange argue that much of the consumer borrowing is to fund necessities.
In his early days at the BoE, Mr Carney focused on the jobs market as a major influencer of monetary policy, but that led to some highly misleading signals. Some still point to record employment levels as a reason to raise rates. Yet many impoverished families are counted in the employment statistics. They are working but not earning enough to make ends meet. Meanwhile, real wage growth is slowing and pay is not likely to increase while large numbers of the workforce are keen for more hours. A headline unemployment rate of 4.2 per cent is no reason to raise rates.
In a recent interview with Bloomberg, Mr Carney said he expected interest rates in large economies to be back at their long-term average “hopefully in my lifetime”. Since he is only 53, that should be a signal that the BoE will not move with undue haste.
The writer is a Conservative peer and chairs the FT’s appointments and oversight committee
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