Is the Bank of England in danger of damaging its credibility on interest rate policy?

18th June 2014

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It may not seem that way to him, but the Bank of England Governor Mark Carney needs to be careful he doesn’t develop a little bit of a credibility problem on interest rates.

First we had forward guidance which gave businesses, savers (to their extreme annoyance) and borrowers a great deal of security about the future direction of interest rates i.e. staying low for longer. It was announced in August 2013 and many people thought it relied on unemployment dipping to 7%. It was thought interest rates would remain low until 2016.

Then it was dropped – sort of – because unemployment fell to near and then recently below 7%. Now of course the quality of those jobs, rates of pay, levels of self-employment and under employment required nuance, but surely Mr Carney and the MPC could have appreciated some of that in advance.

(For example, the Wall Street Journal blog has dubbed foward guidance as worthless guidance)

Then there is the booming property market – up ten per cent in a year – but still so London centric as to have some mortgage experts suggesting that much of the rest of the UK is still in the early stages of recovery. At the extreme, Northern Ireland is up about 2% on the year and has only started to recover.

So what is a Governor to do? Well, at the Mansion House last week Carney suggested that the interest rate decision was in the balance. Cue speculation of rises early next year, or even late this year.  Sky News suggested he had upstaged the Chancellor George Osborne, who, for his part, suggested the Bank could get new powers to restrict mortgages.

Actually, maybe the words did just that anyway. In the mortgage trade press, it was reported that fixed rate mortgages were on the rise and could rise further as Mortgage Strategy reported due to the speeches.

Small rises were expected, but many experts said we were looking at a ‘normal’ interest rate environment sooner rather than later.

So therefore, bad news for borrowers, not so good news for business, though actually a better economy would probably balance small rises in rates, and finally, finally, better news for savers. As for markets, most commentators suggested that a small rise or two would be manageable both for stocks and fixed interest with a decent tactical asset allocation.

Now we learn that inflation is 1.5% measured by CPI at least. The minutes of the last Bank meeting show unanimity for holding rates at their historic low. The Bank or at least the room where the Monetary Policy Committee meets remains a dovecote.

Perhaps no-one will mind if the economy continues to improve, and we avoid – perhaps in a year’s time – a big interest rate shock but see a gradual return to normality. If the Bank uses other clever measures and not just interest rates to calm the housing market it will certainly deserve plaudits.

But it feels as the current chopping and changing in tone isn’t helping very much. The Bank and Mr Carney may be straining its credibility and that is surely a very important policy tool to lose.

1 thought on “Is the Bank of England in danger of damaging its credibility on interest rate policy?”

  1. Malsta says:

    What credibility? Mr Blarney utters something and sets everyone spinning. It was clear in 2008 that the best option was to sit on our hands and do nothing for at least five years and the 10% contraction would be made up naturally. It was touch and go with the Euro but we got lucky. Osborne isn’t known as Lucky George for nothing (or maybe he is?).

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