Mixed messages greet the new governor

IT’S a big week for UK monetary policy. Mark Carney has just taken over as governor of the Bank of England and he’s got a lot to prove. He attends his first rate setting meeting on Thursday, but faces a delicate decision. This probably means tempering our high expectations.

His predecessor Sir Mervyn King left office having being outvoted on the last five occasions to extend quantitative easing. The new governor will want to make sure he does not find himself similarly marginalised. He has, after all, just one vote out of nine, and data over the last few weeks suggests growth seen in the first quarter has continued in the second. Purchasing managers indices are all above 50, retail sales volumes were strong in May, and housing activity is showing signs of strengthening. Indeed, figures out yesterday suggest that recovery in two of the weakest parts of the economy, manufacturing and mortgage lending, is gathering steam.

We have been here before, and there is always the chance that future data may again disappoint. But against this current backdrop, it’s unlikely a majority of the Monetary Policy Committee (MPC) is ready to restart asset purchases. Carney could argue that the recent surge in gilt yields and interest rate expectations means there’s still a case for more QE, but that will probably have to wait a few more months. He will undoubtedly want to get his feet under the table first.

Another area for debate is forward guidance. Whether it’s this month or not, Capital Economics says the bare minimum is likely to be a commitment to keep policy loose until a certain threshold has been reached. A bolder step would be to commit to loosen policy until a threshold has been reached. That threshold could be for nominal GDP, unemployment or wage growth.

Other measures we may see in time might focus more on bank lending. The MPC has fully supported Funding for Lending and is likely to back more initiatives in this area.

We now know that not only did the country avoid a triple dip recession but, following the latest revisions, it also avoided a double dip. That was the good news. The bad news was that the recession after the collapse of Lehman Brothers was much deeper than originally thought. It means the economy is still some 4 per cent below its peak. When you factor that in, and given the continued likelihood of drag from public sector spending restraint, it’s clear that Carney will have his work cut out to make sure the UK economy reaches escape velocity.

Ross Westgate co-presents CNBC’s Worldwide Exchange. Follow him on Twitter @rosswestgate