The new Governor of the Bank of England, Mark Carney, is clearly intent on achieving celebrity status. In one week he fooled the British people into believing that interest rates will stay low, attacked ‘socially useless’ bankers and avoided questions on the Financial Stability Board’s handling of the Co-operative Bank situation. He is the chairman of the board.
It is his statement on the course of interest rates that deserves the closest attention. What Mr. Carney actually said was that the Bank of England pledges to keep interest rates at record lows of 0.5% until unemployment falls to 7% subject to financial stability and inflation staying under control. The pound fell thus helping exporters but putting an inflationary pressure on imports. Mr. Carney’s statement begs three key questions:
a) It is the Monetary Policy Committee that sets interest rates. Was there a 100% vote for this policy and are members willing to be involved in politics? This assumes members still have a say in the matter.
b) What does “subject to financial stability” mean? Who has defined the measure? The cynic might feel it suggests that Mr. Carney can, at any time, do what he wants justifying this on the issue of “financial stability”.
c) Mr. Carney said that it depends on “inflation staying under control”. It isn’t under control. The target is 2% and the CPI is 2.7%.
One of the features of this Coalition Government is its willingness to push democratic law to one side and to impose subjective judgement. The issue of retrospective taxation is one such example.
Mr. Carney was appointed by the Chancellor of the Exchequer and thus it might be possible that he feels an obligation to help the Conservatives win the May 2015 General Election. The economy is picking up due in part to a revival in the housing market. The financial press are more bullish. The possible public sales of Royal Mail, RBS and Lloyds Bank shares will provide an opportunity to make the voters feels more affluent.
The misjudgement he might have made is to tie interest rates into the rate of unemployment. The general uplift in house prices (where the economic law of supply and demand will apply given the desperate shortage of new houses for our ever increasing population: now 63.7 million people), the possible desperation of OPEC members to make money before fracking brings oil prices down and an uplift in Europe (Greece is still there) could see Mr. Carney having to eat humble pie.
“Not at all” he will say. “Whatever I do is to ensure financial stability despite the fact my policies have been the cause of the destabilisation in the first place.”