Neil Williams, Hermes

Carney is right to be cautious

Neil Williams (pictured), Chief Economist for Hermes’ Global Government & Inflation Bonds, on Bonk of England Governor Mark Carney’s forward guidance…

Governor Carney is right to be cautious about the ‘sugar-rush’ recovery so far, and keeping his stimulus options, such as QE, on the table. At first glance, though, marrying ‘forward guidance’ on rates with a 2% CPI target deferred another six-12 months to the end of 2015 will worry some he is further subordinating inflation-control to growth considerations. The MPC’s choice of unemployment as a policy-yardstick also seems as much as ‘puzzle’ as the puzzle it has posed them trying to explain it so far.
 
This experiment will be interesting, and it remains to be seen whether forward guidance ends up being more cosmetic than real, with little added impetus to growth.
 
With world recovery still groggy, most consumers and firms will doubtless already know that Bank rate is staying low for longer, and the ‘bells and whistles’ attached to guidance – the unemployment rate and so-called ‘knock outs’ that will nullify guidance – now need be easily communicated to be tested. Worst of all, guidance could even back-fire if certainty that rates in two years time are likely to be as low as they are today simply defers purchases, which gets us into the realms of ‘a Japan’.
 
More likely, after the sugar rush of this summer’s housing, sport and royal-baby-associated growth-spurt and, yet, the prospect in my view, that CPI inflation could shave its 2% target next spring, suggests Dr Carney may eventually pick up the QE baton, later in the year.


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