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| Version 1 | Version 2 |
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| Interest rates: Mark Carney is right to remain cautious | Interest rates: Mark Carney is right to remain cautious |
| (7 months later) | |
| Mark Carney is halfway through his five-year term as governor of the Bank of England. Judging by his latest remarks on the state of the economy, he could go back to Canada in the summer of 2018 and still not have raised interest rates. | Mark Carney is halfway through his five-year term as governor of the Bank of England. Judging by his latest remarks on the state of the economy, he could go back to Canada in the summer of 2018 and still not have raised interest rates. |
| The governor’s speech was notable for its dovish tone. Six months ago, in a speech in Lincoln, he said the decision on whether to increase the cost of borrowing would come into sharper relief around the turn of the year. That was seen as an indication that a tightening of policy would be announced sooner rather than later. | The governor’s speech was notable for its dovish tone. Six months ago, in a speech in Lincoln, he said the decision on whether to increase the cost of borrowing would come into sharper relief around the turn of the year. That was seen as an indication that a tightening of policy would be announced sooner rather than later. |
| Well, the turn of the year has arrived, Carney has decided that the time is not yet ripe for a rate rise. Marching the markets up to the top of the interest rate hill only to march them down again has become a bit of a habit. | Well, the turn of the year has arrived, Carney has decided that the time is not yet ripe for a rate rise. Marching the markets up to the top of the interest rate hill only to march them down again has become a bit of a habit. |
| For all that, the governor’s caution is justified. Carney said a “powerful set of forces” – some domestic, some global, some long-lasting, some cyclical – had combined to keep interest rates at their record low rates since the Great Recession ended in 2009. | For all that, the governor’s caution is justified. Carney said a “powerful set of forces” – some domestic, some global, some long-lasting, some cyclical – had combined to keep interest rates at their record low rates since the Great Recession ended in 2009. |
| And he cited three developments that had pushed back the likely date for rates to rise. Firstly, there is no sign of the economy picking up momentum. The UK grew at a robust rate in 2014 but cooled off in 2015: growth averaged around 0.5% a quarter – slightly below its long-term trend. | And he cited three developments that had pushed back the likely date for rates to rise. Firstly, there is no sign of the economy picking up momentum. The UK grew at a robust rate in 2014 but cooled off in 2015: growth averaged around 0.5% a quarter – slightly below its long-term trend. |
| Secondly, unemployment has continued to fall but wages pressures have been noticeable by their absence. In part, the Bank thinks this is due to the fact that job creation has been concentrated in poorly paid jobs. But Carney also believes that the low level of inflation – still only at 0.2% after its rise in December – has played a part. Employers have used zero inflation as the starting point for pay talks, and see 2% as a generous offer in the current climate. | Secondly, unemployment has continued to fall but wages pressures have been noticeable by their absence. In part, the Bank thinks this is due to the fact that job creation has been concentrated in poorly paid jobs. But Carney also believes that the low level of inflation – still only at 0.2% after its rise in December – has played a part. Employers have used zero inflation as the starting point for pay talks, and see 2% as a generous offer in the current climate. |
| Finally, core inflation – the cost of living with items such as energy and food stripped out – remains well below the government’s 2% inflation target. | Finally, core inflation – the cost of living with items such as energy and food stripped out – remains well below the government’s 2% inflation target. |
| When the US Federal Reserve raised rates in December, there was speculation in the City that the Bank would follow suit relatively quickly. That is no longer the case, and Carney was at pains to point out that the UK was more vulnerable to tremors in the global economy and had to cope with George Osborne’s austerity drive. | When the US Federal Reserve raised rates in December, there was speculation in the City that the Bank would follow suit relatively quickly. That is no longer the case, and Carney was at pains to point out that the UK was more vulnerable to tremors in the global economy and had to cope with George Osborne’s austerity drive. |
| Unsurprisingly, the pound fell as soon as Carney started speaking. A rate rise in the first half of 2016 is a non-starter. A rate rise in the second half of 2016 is becoming a more remote possibility by the month. Sentiment can change swiftly, of course, and if the global storm blows over and inflationary pressure starts to build, rates could go up more quickly than currently forecast. | Unsurprisingly, the pound fell as soon as Carney started speaking. A rate rise in the first half of 2016 is a non-starter. A rate rise in the second half of 2016 is becoming a more remote possibility by the month. Sentiment can change swiftly, of course, and if the global storm blows over and inflationary pressure starts to build, rates could go up more quickly than currently forecast. |
| There has, though, been gossip recently about Carney extending his term of office. It may be only way he will ever get to announce an increase in borrowing costs. | There has, though, been gossip recently about Carney extending his term of office. It may be only way he will ever get to announce an increase in borrowing costs. |