Mark Carney and forward guidance

The new governor of the Bank of England (BoE) has today attempted to correct some of the misperceptions he thinks have marred the implementation of the BoE’s new ‘forward guidance’ policy.

When he wasn’t making excruciating references to young popular musicians (Jake Bugg, since you ask – and no, I have no idea who he is either), Mr Carney was carefully explaining why he thought markets had misjudged their reaction to the recent BoE meeting that set out the new idea of forward guidance.

Misunderstandings

Mark Carney would not be the first central banker to claim that he was being misunderstood, and people should ask Ben Bernanke of the Federal Reserve if they want to hear more about this kind of phenomenon. But such guardians of monetary policy do need to realise that, just because they believe their thinking is clear, it doesn’t necessarily follow that markets will agree with their logic.

Today seems to have had a similar impact. GBP/USD has risen, as the market seemed to interpret the speech as an indication that the bank would still have to raise rates earlier than forecast. Mr Carney thinks the market is wrong. He envisages slow growth using up spare capacity in the economy only gradually, while job creation in the private sector will not be able to match the roles lost in the public, and finally full employment will take longer than thought due to the rise in part-time workers.

Implications of growth

However, there will still be those who, with good reason, think the BoE will still end up raising rates earlier than expected. GDP growth in the UK appears to be picking up, while the confidence that has been absent for so long does appear to be creeping back. This can create the kind of self-reinforcing cycle that will lead to yet-faster growth, catching Threadneedle Street by surprise. In addition, the private sector has done a commendable job in soaking up the workers left out in the cold by reductions in public spending. This demonstrates an underlying solidity to the private sector in Britain.

Finally, and most problematic for Mr Carney, we don’t have a crystal ball. A broad-based improvement around the world will drag the UK into strong growth even quicker than many expect, and so Mr Carney could find himself trying to combat bubbles that currently don’t exist. Perhaps he ought to spend more time refining his tone on forward guidance rather than thinking up trendy cultural references.

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