Unemployment is down, wages are up and inflation is forecast to rise too high in a couple of years. Surely it is time to raise interest rates, isn’t it?
Not so, Mark Carney said yesterday. Borrowers may cheer, but it is a touch worrying that the governor seems keen to keep rates down for any reason he can think of.
At the start of his tenure in mid-2013, Carney introduced forward guidance in a move which was, in the world of monetary policy, something close to revolutionary.
The idea was to stop investors and journalists trying to guess exactly when rates would change on a month-by-month basis.
In the past, press conferences were dominated with questions asking if rates were changing imminently.
Instead, a range of thresholds were set, most notably that the Bank’s monetary policy committee would consider a rate hike when unemployment fell to below six per cent. That happened faster than Carney expected – by early 2014.
Instead of looking to raise rates, the Bank said a hike would come when spare capacity had been eroded, just in time to stop inflation taking off.
Spare capacity is almost used up now, according to the Bank’s own collective view – it has fallen to 0.5 per cent, and will be gone within 12 months, Carney said yesterday.
His former deputy governor Charlie Bean said the aim would be to raise rates in anticipation of that moment, as monetary policy changes take around 18 months to kick in. That would suggest a hike is overdue.
But not so – Carney said he fears raising rates, in case he ends up impeding the erosion of spare capacity.
It looks a lot like he is moving the goalposts.
It is good that he is wary of choking growth – but Carney is also paid to take away the punchbowl before the party-goers get too tipsy.