Analysis

Bank of England governor’s move to persuade markets that interest rates will not immediately rise has provoked skepticism. His first 100 days as Bank of England governor have been a noisy medley of speeches, impeccably tailored photo-calls and pzazz…

 


Powered by Guardian.co.ukThis article titled “Is Mark Carney’s forward guidance plan a step backwards?” was written by Heather Stewart, for theguardian.com on Monday 7th October 2013 14.00 UTC

If Mark Carney was going to live up to his billing as a “rock star central banker” – and his £874,000 a year pay package – he had to arrive in Threadneedle Street on a crashing crescendo. His first 100 days as Bank of England governor have been a noisy medley of speeches, impeccably tailored photo-calls and pzazz.

From the need for more women on banknotes to his love of Everton football club, Carney has had plenty to say on a range of subjects since his appointment on 1 July this year. However, it’s the Bank’s new policy tool of forward guidance that has provoked the most interest, and a good measure of scepticism, among seasoned Bank-watchers.

Honed by Carney in Canada and adopted by the US Federal Reserve and the ECB in different forms, forward guidance is a way of signalling to the public and financial markets how the Bank will respond to shifts in the economy. In this case, the monetary policy committee has pledged to keep interest rates at their record low of 0.5% at least until the unemployment rate falls to 7%.

“Forward guidance is an attempt to persuade the markets that interest rates are not immediately going to go up,” says John Van Reenen, director of the Centre for Economic Performance at the London School of Economics. “It’s one more tool in the toolbox.”

However, as implemented by Carney and his colleagues in the UK, guidance is hedged about with three separate “knockouts” – rates would rise if inflation, financial stability or the public’s inflation expectations got out of control. Moreover, the governor has stressed that the 7% unemployment rate is not a trigger for a rate rise, but a “staging post”, which will not necessarily prompt tighter policy.

During a somewhat fraught hearing with MPs on the cross-party Treasury select committee last month, in which Carney sought to clarify the policy, chairman Andrew Tyrie expostulated that it would be a hard one to explain “down the Dog and Duck”.

Financial markets have also been less than convinced. The yield, or effective interest rate, on British government bonds – partly a measure of investors’ expectations of future interest rates – has risen rather than fallen since the Bank’s announcement. That is partly because the latest data suggests the economic outlook is improving, but rapidly rising bond yields can be worrying because they tend to push up borrowing costs right across the economy. Carney, though, has insisted he is not concerned.

Meanwhile the pound has risen almost 4% against the dollar since Carney took the helm – again signalling markets expect rates to rise sooner than the Bank is indicating. Last week sterling hit a nine-month high, although it came off that peak as investors began to question if the UK’s recovery could continue at its current pace.

“I don’t think in practice forward guidance is very successful,” says Jamie Dannhauser of Lombard Street Research. He believes Carney has failed to convince the City he means business, because he has failed to back up forward guidance with action, such as the promise of a fresh round of quantitative easing – the Bank scheme that has pumped £375bn of freshly minted money into the economy.

“[Forward guidance] doesn’t work if you’re not willing to take on the markets if you don’t get your way,” says Dannhauser.

David Blanchflower, a former member of the MPC, is more blunt: “He looks already, within a hundred days, to have lost control. Bond yields are rising, the pound is rising like mad, and they’ve got no response.”

He argues that the hedged nature of the new policy is likely to reflect “horse-trading” between Carney and his fellow MPC members. Unlike in Canada, where what the central bank governor says goes, decision-making on the MPC is by vote. With a recovery now under way, its various members are known to have differing views on what are the most pressing risks to the economy.

Another former MPC member said: “Had I been on the MPC I would have let him do it [forward guidance], because I don’t think it does any particular harm; but I don’t think it does much good either.”

It’s not just the Bank’s approach to monetary policy that has changed on Carney’s watch. When outgoing deputy governor Paul Tucker, who missed out on the top job, leaves for the US later this month, it will mark the latest in a number of personnel changes that are starting to make Carney’s Bank look quite different from Lord (Mervyn) King’s.

Blue-blooded banker Charlotte Hogg joined as the Bank’s new chief operating officer, a post that didn’t exist under the old regime, on the same day as Carney. Meanwhile Tucker will be replaced by former Treasury and Foreign Office apparatchik Sir Jon Cunliffe. With long-serving deputy governor Charlie Bean due to leave early in 2014, Carney will be given another opportunity to bring in a new broom.

Insiders say the atmosphere in the Bank’s Threadneedle Street headquarters has already changed. Carney is often seen eating lunch in the canteen or showing visitors around. His approach is less hierarchical than that of King, who was derided as the “Sun King”, by former chancellor Alistair Darling – though Carney is said to be no keener on intellectual dissent than his predecessor.

He will need all the allies he can get both inside and outside the Bank, if he is to deal successfully with what many analysts see as the greatest threat facing the economy: the risk that an unsustainable bubble is starting to inflate in Britain’s boom-bust housing market.

Carney and his colleagues on the Bank’s Financial Policy Committee (FPC), the group tasked with preventing future crashes which partly overlaps with the MPC, have new powers to rein in mortgage lending if they believe a bubble is emerging, and the governor has said he won’t hesitate to use them.

But the FPC is untested and largely unknown to the public, and bubbles are notoriously hard to spot. Using the FPC’s influence to choke off the supply of high loan-to-value mortgages, for example, would be hugely controversial at a time when large numbers of would-be buyers have been frozen out of the market. Meanwhile, the government’s extension of the Help to Buy scheme, with details to be laid out on Tuesday, is likely to increase the demand for property, potentially pushing up prices.

Van Reenen warns that if property prices do take off, Carney could find himself in an unenviable position. “We have this terrible problem in this country that house prices have got completely out of kilter with incomes. I would be very reluctant to see interest rates start pushing up. Using other methods, such as being tougher on Help to Buy, and trying to do things through prudential regulation is better – but the fundamental thing is lack of houses, and Carney can’t do anything about that.”

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USA 

It is time for the European Central Bank to show its independence and act in the interests of all eurozone citizens– not just Angela Merkel’s, writes The Guardian’s economics editor Larry Elliott.  A different approach is needed to save the eurozone…

 


Powered by Guardian.co.ukThis article titled “European Central Bank must heed eurozone warning signs” was written by Larry Elliott, economics editor, for The Guardian on Tuesday 30th April 2013 12.57 UTC

The warning signs are flashing red for the eurozone. Inflation is plunging, unemployment is rising and activity is weakening across the board. Unless Europe wants to become the next Japan, mired in permanent deflation and depression, action is needed now.

Stage one of the process should be a cut in interest rates from the European Central Bank (ECB) when it meets in Bratislava on Thursday. The latest inflation figures show the annual increase in the cost of living across the 17-nation single-currency area fell from 1.7% to 1.2%, its lowest in three years and well below the ECB's 2% ceiling. Even Jens Weidmann, the ultra-hawkish president of Germany's Bundesbank, would be hard pressed to say there is a threat to price stability.

It's not hard to see why inflationary pressure is abating: the eurozone economy has been flat on its back for the past 18 months. Unemployment rose by 62,000 in March, taking the eurozone jobless rate to yet another record high of 12.1%. Spain and Greece remain the weak spots, but even in Germany labour market conditions are becoming more difficult. Across the eurozone, almost one in four young people are out of work.

Why is unemployment rising? Again, you don't have to be John Maynard Keynes to figure it out. Europe's banking system is bust, there is a shortage of credit, real incomes are under pressure and the deficiency of demand is being exacerbated by austerity overkill. Retail sales figures from Greece show that in February spending was more than 14% lower than a year earlier.

The malaise is spreading from the eurozone's periphery to its core. It will be mid-May before the official growth data for the first quarter of 2013 is published, but the early evidence from Spain, where GDP fell by 0.5%, is not encouraging. Judging by the grim forward-looking surveys of business and consumer confidence, the second quarter will suffer more of the same.

Monetary policy works only with a lag, so whatever the ECB does on Thursday will be too late to prevent the recession deepening. Angela Merkel has made it clear that she does not want to see a cut in the cost of borrowing, but it is time for the ECB to show its independence and act in the interests of all eurozone citizens, not just the one seeking re-election in the German polls this autumn.

In itself, a quarter-point cut in interest rates to 0.5% would do little to revive demand, ease the credit crunch or create jobs. Instead, it should be part of a three-pronged approach to boost growth. The cut in rates should be accompanied by an ECB announcement that it is willing to embrace the unconventional methods deployed by the Federal Reserve, the Bank of England and Japan to underpin activity. It should also be the catalyst for a less aggressive approach to cutting budget deficits, with countries given more time to bring their deficits below the eurozone ceiling of 3% of GDP.

For the past three years, macroeconomic policy in the eurozone has been run on sadomasochistic principles: that only regular doses of pain will ensure countries stick to strict reform programmes.

The upshot of this policy is clear for all to see. Businesses that are starved of credit are mothballing investment and cutting their workforce. Weaker growth means higher-than-expected budget deficits. Permanent austerity has bred social dislocation and political extremism. A different approach is needed to save the eurozone from catastrophe – starting on Thursday.

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The U.S. economy added 163,000 jobs in July but the unemployment rate remained stubbornly above 8% for another month with an increase to 8.3%; Rebalancing of US economy is underway but retail sales and factory orders data point to weaker jobs growth in months ahead…



Powered by Guardian.co.ukThis article titled “US jobs data less rosy than they seem” was written by Larry Elliott, economics editor, for guardian.co.uk on Friday 3rd August 2012 14.47 UTC

There are three months to go until the US presidential election so the America jobs report will cheer Barack Obama after recent signs that the world’s biggest economy was coming off the boil. But the figures were not unalloyed good news for the president.

On the upside, the increase of 163,000 in non-farm payrolls was a lot better than the 100,000 rise Wall Street had been expecting. What’s more, the detail was encouraging, with a hefty jump in private-sector employment and a 25,000 increase in manufacturing jobs. A modest and long overdue, but welcome, rebalancing of the US economy is underway.

That said, the expansion of the labour market is no great shakes more than three years into a recovery, and extremely poor by US standards – America was once the envy of the world for its ability to create jobs in the upswings after recessions.

The payrolls numbers were accompanied by a household survey of unemployment which showed the jobless rate climbing from 8.2% to 8.3%, 0.4 points higher than when Obama became president.

The U6 rate, which includes people who are working fewer hours than they would like, rose to 15%. Throw in a labour participation rate lower than it was four years ago, and tepid wages growth, and the picture is of jobs data good enough to rule out for the time being any fresh steps from the Federal Reserve to boost activity but not good enough to prove conclusively that the economy is emerging from its soft patch.

Obama would no doubt like a helping hand from the Fed, but if Ben Bernanke and his colleagues were not prepared to do more quantitative easing when jobs growth slowed between April and June, they are unlikely to do so now.

As in Britain, the labour market seems to be in slightly better shape than the economy as a whole. As Chris Williamson of Markit noted, the recent data for retail sales and for factory orders has been weak, suggesting that the economy has lost momentum since the turn of the year. That points to weaker jobs growth in the months ahead.

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