With a long history of boyfriend unreliability, Blondemoney considers herseflf somewhat of an expert on the topic. Throw in her knowledge of central bankers and who better placed to be judge, jury and executioner on the serial offender Mark Carney, Governor of the Bank of England. It comes as no surprise that a rollercoaster ride for GBP took place as Carney’s comments suggested a flip-flopping over the outlook for interest rates in a period of just 8 days:
The instinctive response is to bewail that the leopard is showcasing his usual please-everyone spots. This is not the first time the consummate politician has leapt from one side of the argument to the other.
On this occasion, however, we should plead leniency. Look more closely at the two speeches he gave below:
Mark Carney, 20th June:
“Different members of the MPC will understandably have different views about the outlook and therefore on the potential timing of any Bank Rate increase. But all expect that any changes would be limited in scope and gradual in pace.
From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment.
In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.”
Mark Carney, 28th June:
“When the MPC last met earlier this month, my view was that given the mixed signals on consumer spending and business investment, it was too early to judge with confidence how large and persistent the slowdown in growth would prove. Moreover, with domestic inflationary pressures, particularly wages and unit labour costs, still subdued, it was appropriate to leave the policy stance unchanged at that time.
Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional. The extent to which the trade-off moves in that direction will depend on the extent to which weaker consumption growth is offset by other components of demand, including business investment, whether wages and unit labour costs begin to firm, and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit negotiations. These are some of the issues that the MPC will debate in the coming months.”
The highlighted sentences are those that the market fell upon, which in isolation suggest he simply flipped from “not raising yet guys”, to “we’ve got to raise rates”. But the rest of the statements were almost word-for-word identical. He has his understandable doubts about whether the consumer is robust in the face of stagnating wages; whether investment can replace consumption as a driver of growth; and whether any growth momentum can continue with the ongoing Brexit uncertainty. In his defence, both highlighted statements could be true. He could believe now, right now, is not the time to raise rates, while also believing that QE needs to end soon. (Note that he uses the phrase “more conventional”; QE is clearly the apotheosis of unconventional policy.)
A less generous, and often-spurned, commentator might cynically conclude that in fact he has merely noticed the way the wind is blowing. After an unexpected 2 vote dissent in the June MPC meeting, along comes the Bank’s chief economist, former uber-dove Andy Haldane, with the electrifying revelation that he too almost voted for a rate rise. His comments came on 21st June. Carney’s about turn followed 7 days later. With Charlotte Hogg yet to be replaced on the MPC, that leaves only a 5-3 split in favour of leaving rates unchanged. If anyone else were to flip, at 4-4, Carney would have the casting vote. Governors rarely like to be outvoted; it suggests their leadership of the committee is under pressure. And this vote would be a very personal one. The rate cut and increased QE of last August were very much a Carney-driven decision, what with his pre-Brexit vote lamentations about the potential immediate doom in the aftermath of a Leave vote. Now it turns out that the economy not only failed to fall off the preached-about cliff, but in fact rallied back hard as the weaker pound encouraged foreign investment, alongside a global reflationary boost. To take back the cut would be almost an admission that it wasn’t needed in the first place. Arguably it even proved pro-cyclical. No wonder the hawks on the committee have become more vocal about its removal.
Haldane himself made specific reference to the August stimulus when he spoke in the context of a rate hike:
“Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year”
Carney’s 28th June speech was merely giving him the wiggle room to hike / reduce QE but present it as just a removal of extraordinary stimulus. Another one of those “dovish hikes”. Why the flip-flop now? Well, there is a window of political opportunity. Inflation is already well above target, motivating hawkishness. The result of the General Election means that it may be hard to pursue fiscal prudence; equally it may hurt inward investment as the reality of a deadlocked government vacuum becomes clear. In other words, we may be just ahead of the next bout of Sterling weakness – which would get inflation turning even higher. It may be best to remove that extra stimulus before that happens.
The next MPC meeting is on the 3rd August, and will be accompanied as usual by the quarterly Inflation Report. This will provide a plethora of opportunities to explain the decision and try not to frighten the horses.
The ECB have seen recently how skittish the market horse can be: any hint of tapering and the Euro and EU rates are off to the races, with both now at the year’s highs. Hence they’ve flirted with their own unreliable boyfriend status, with a knowing wink this week to Reuters from those always cheeky “sources”, about not going all the way with their stimulus removal. As one source naughtily revealed on Monday, “I was thinking we’d drop the other easing bias in July, but after the market reaction to Draghi’s speech I’m less sure about it“. Ooh, will they, won’t they? If this were an episode of Love Island and not actual life-changing monetary policy decision-making, their unreliable flirtations might actually be engaging.
Instead, they’re just downright frustrating.
Sure, we all understand the issues ahead. We know the taper tantrum of April 2013 and the Bund tantrum of 2015 were destabilising events. But surely with stock markets at record highs, and volatility at record lows, they could take the punt that perhaps the alleged emergency stimulus programmes might now be table to be taken away as the economies no longer require life support? That perhaps, if not now, than never? That perhaps, the persistence of perma-QE has worked only to distort markets and generate a massive asset boom that has driven a widening inequality which is only now manifesting into a burgeoning political rage?
The irony is that the cat is already out of the bag. Pandora is out of her box and may end up out of her tree. There is a madness infecting the market and the electorate that cannot be shaken. Central Bankers may try to flirt with us but they’re purely vapid disposable Love Island bimbos trying desperately to remain relevant.
North Korea has tested an intercontinental ballistic missile that could reach Alaska.
The US is threatening China with trade tariffs while its President conducts foreign policy by tweet.
Oil producers can’t agree on their feelings towards each other, let alone the oil market.
Whether a central bank hikes rates is beyond irrelevant, aside from providing another match to the growing pile of tinder. Where the US Dollar benefited from interest rate divergence, now everyone else is rushing to catch up. There is now convergence. Interest rates tend not to drive currencies when that is the case. Just as well there’s the small matter of war, whether trade, commodity, or nuclear, to drive us instead.