Avoiding the iceberg

This morning, Britain’s economy-watchers trained their attention on Mark Carney, the new Governor of the Bank of England, who stepped out onto the British monetary stage to deliver his opening number. Or should that be numbers.

His intention is to give what is now termed “forward guidance” on the Bank’s economic plans, so that businesses—and perhaps politicians also—can plan for the future, knowing that the bank is not going to spring an unpleasant surprise by suddenly adjusting interest rates. (For more on this, see James Zuccollo’s blog from yesterday.)

So what was the forward guidance, from the new Tiresias of Threadneedle Street? That the Bank would continue to hold down interest rates. That this would remain the case until unemployment dropped below 7 per cent. That the Bank’s own Monetary Policy Committee, the body that sets interest rates, thinks that this moment could come sometime in late 2016. And that there are circumstances in which the Bank might change its plan. So, for example, if inflation looks like it might rise too high, then the bank might put up rates in order to bring it back down again.

I spoke to one senior economic analyst who was underwhelmed by the morning announcement from Carney. “I can't for the life of me understand—or agree—the fascination people (that includes serious and respected commentators as well as financial sector economists) have with or significance they ascribe to forward guidance.”

“Do companies and [households] really need convincing that policy rates aren't going anywhere for a long time? And are they holding back from lending and spending because they're fretting about higher borrowing costs? To me it's risible at best, and more likely drivel.”

Now, Carney has set in place a system in which, when the time comes, a warning will be issued before rates go up. There has been intense interest in the new arrangements, but will they do any good?

It will be intriguing to watch what happens when that interest rate warning finally comes—when it comes, will mortgage holders, or highly leveraged businesses be able to do anything about it? Or will they simply have to bob in the water, watching as the iceberg draws ever closer?