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How much can we trust Mark Carney?

11 May 2018

How much can we trust Mark Carney?

It has been suggested in some places that Bank of England ("BoE") Governor, Mark Carney, could be compared to an unreliable boyfriend: promising one thing and delivering another. Up until the beginning of April, an interest rate rise at the May Monetary Policy Committee ("MPC") seemed a near certainty. Mark Carney’s comments, a tight labour market, inflation above the 2% target and the fact that two members had voted for a rate rise at the previous meeting, supported this view. During April, as the economic data for March appeared, confidence in this view wavered then collapsed. On Thursday, the MPC voted 7-2 to hold the base rate unchanged.

Looking back over the last six weeks, we see a pattern of weaker data. In Mid-April, Consumer Price Inflation fell to 2.5% from 2.7%. This is partly due to the effect of the Brexit devaluation coming out of the annual numbers faster than expected. Later in the month, first quarter GDP economic growth also disappointed with a measly 0.1% rise, although the BoE note that this may be revised up when all the data is available. Then as we entered May, net consumer credit rose £0.3bn, the worst figure for five years. However, all this data could be blamed on the bad weather at the beginning of March. It was at this time that Carney warned that a May rate rise was not a certainty. Perhaps the final straw was the Purchasing Managers Index survey for April, post the bad weather, which was also weaker than expected. On the positive side, unemployment remains low.

All these factors are mentioned in the BoE Inflation report that accompanied the MPC meeting. Uncertainty about Brexit is as high as ever and gives them a further reason to err on the side of caution. All these factors have been weighed up in previous reports. What was new this time was the mention of snow and weather. In the report, there is a section devoted to “the role of temporary factors in recent output growth”. This notes that the weather impact should be temporary and there may be some catch up in output, but in the past, this has had little positive impact in subsequent quarters. If it turns out that the slow-down was just weather related then we may get confirmation of this by the time of the August inflation report.

What was not new in the May report was the mantra that rate rises will be “at a gradual pace and to a limited extent”. They suggest that gradual will be one rate rise a year for the next three years. The UK may be more sensitive than other economies to interest rate rises due to the relatively high home ownership, combined with lots of variable or short-dated fixed rate mortgages. With this sensitivity, it is not surprising that the MPC remain cautious for now.

As the prospect of an imminent interest rate rise faded, the pound and Gilt yields declined. The UK equity market, with a dividend yield of 4% and a prospective price earnings ratio of just 14x, already looked good value. With the additional support of a boost to the value of overseas earnings in Sterling terms, the market rallied strongly. What is bad news for the economy is not always bad for the stock market.

Labelling Mark Carney as an unreliable boyfriend, I believe, is harsh. He has always warned that rate moves would be dependent on data and gave a clear indication to markets that the view on the May rate rise had changed. Calling him an unreliable boyfriend is like blaming your companion when you are out for a walk on a sunny day and get caught in an unexpected thunderstorm; just bad luck.

 

 

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