In the ongoing adjustment to the End of Monetary Policy World, even the central bankers are losing it. Two Canadians failed spectacularly to cover themselves in glory over the past 48 hours, covering themselves instead in some kind of lack-of-credibility goo, much as would have been dumped upon them in Noel’s House Party, were they C-list celebrities in the 1990s.
Sadly, they’re actually A-list central bankers, and sadly we still listen to them. Even though they know about as much as we do; that is to say, nothing.
First up, was the Bank of Canada’s Poloz, who last week told the world that they had discussed cutting interest rates, even as they still decided to leave them on hold. This came as news to the market, which duly priced in some cuts and took the Canadian dollar lower. Then this week he said, “our best plan right now, we think, is to wait for the next 18 months or so”. He then tried to clarify this timescale as applying to the output gap, rather than an indicator on rates, but the gunging had already taken place.
Then yesterday we have the Bank of England’s Carney. Just two months after the much trumpeted post-Brexit vote rate cut, he now says “stimulus has its limits”, markets were “mistaken” on the doom. More specifically, he says ‘we are not indifferent to the level of the exchange rate. We have seen in recent weeks a fairly substantial shift in the exchange rate….It’s undoubtedly something we will take into account over the course of the next week as we sit down’.
Hang on a minute?? Wasn’t this the guy exchanging letters with the new Chancellor where both agreed that they would be entirely happy to look through any spike in inflation? That a weaker pound is a great pressure valve and rebalancer for the economy? Here’s a reminder of those letters kiddo:
‘You make clear the MPC’s judgement that fully offsetting the persistent effects of sterling’s depreciation would lead to an undesirable loss in output and employment and would be less likely to generate a sustainable return of inflation to the target beyond the three-year forecast horizon’
So just two months later and you’re all spooked by an almost 10% depreciation in your currency? What were you expecting exactly?
To be fair, these about-turns are symptomatic of two things:
1, monetary policy is less relevant
2, the market is over-reacting one way and then the other because it hasn’t got used to that yet.
Is it any wonder that Carney might just want to get out after the 5 year term he started with? Rather than extend to the normal 8 year term, and see through the Brexit process? It would be “an entirely personal decision” he said yesterday, while being grilled in the House of Lords. Ever thought your job description didn’t quite match the reality? Wouldn’t you pull the ejector seat?
Overall it is a reminder to the market: don’t be complacent, but equally, stop listening to the wrong thing. Start listening to where massive risks are building up and how fiscal policy can eventually fill the void.