BANK of England governor Mark Carney must sometimes rue the day he imported “forward guidance” to Britain from his previous Canadian central bank perch.
As that guidance has swung around in his near-14 months in the hot seat, he has been branded “an unreliable boyfriend” by MPs and a “policy chameleon” in the City.
The governor has lost some of his sparkle. The allegation of him flip-flopping on when the first hike in interest rates from record lows is likely to take place gained extra currency (sorry) last week, when he seemingly pushed back the prospect of a rise until 2015.
This just two months after he sent the pound surging by warning investors were not sufficiently alive to a possible earlier-than-anticipated rate rise. To the central bank’s critics, it’s become the rates version of the hokey-cokey, and they can’t remember if their right leg should be in or out.
The governor said last summer that no rate rise would be considered before UK unemployment fell to 7 per cent, and the Bank forecast it might take three years. But unemployment is well below this figure already. That reference point for assessing the timing of a rate rise has morphed into the new touchstone being the Bank wanting to see improving average wage growth first.
The latter is so flaccid that the Bank last week halved its forecast this year to just 1.25 per cent. More fluctuating guidance, then? No, ahead of the publication of the latest monetary policy committee minutes this week and probable renewed frenzied rates’ rune-reading, we need a sense of proportion.
“Guidance” is just that; it is not a promise or guarantee. And it is based on moving data. As the former government adviser Keynes once said: “When the facts change, I change my mind. What do you do, sir?”
And Carney is surely “on the money” in insisting that more important than the timing of a rate rise is the wider sweep of guidance. We should look at the wave of Bank guidance, not get lost in the transient ripples created by new data and the parsing of governor-speak.
That wider guidance will influence a business’s decision to invest, or a person’s decision to take out a mortgage. And, in that regard, the Bank has been consistent to the point of dullness. Most likely, it has said, is that monetary tightening will be gradual and limited, and average interest rates in future will be less than those historically.
That is more useful to help businesses and households plan than feeding the City casino’s neurotic need to be ahead of the curve. To make specific timing so important is to create a gimcrack totem.
The economy is motoring nicely with the “slack” diminishing, unemployment is falling sharply, and business investing again. This would normally suggest a rate rise. But the geopolitical shadows have deepened, the Eurozone looks shaky again, and, anyway, inflation remains well under control. To tighten policy too early would be to risk destabilising consumer confidence in the name of a chimerical but artificial “consistency”.
Carney and the Bank are not perfect, as their forecasting record shows. But the kneejerk criticism of U-turns that unsettle markets is simplistic. Forward guidance remains a useful, broad tool for the real economy. Unfortunately, markets have decided they want a running commentary instead.
Constructors struggle to build foundations of a deal
IN DANCING terms, the fitful takeover talks between British construction industry stalwarts Carillion and Balfour Beatty have hardly been a stately minuet. More of a foot-shuffle around a handbag as suitor Carillion makes synergy small talk, while target Balfour looks bored.
Carillion coughs nervously and asks if Balfour fancies a special divi; Balfour replies dryly that you should not confuse cost-savings from shrinking the business to more-than-the-sum-of-its-parts efficiency synergies.
The two groups can’t agree on the big picture, either.
The first talks broke down within days after Carillion insisted Balfour cancel the planned sale of its American engineering and design business, Parsons Brinckerhoff.
Carillion has not changed its position on this fundamental difference of opinion on the US business. That looks a deal-breaker by itself, even without the sceptical response of Balfour to the suitor’s promise of £175 million of synergies in areas like back office, supply chain and IT.
In some ways, Balfour is in a weak position to resist overtures after a series of profit warnings and losing its chief executive, Andrew McNaughton, in May. Its shares have fallen 22 per cent in the past six months.
And the company is naive to be sniffy about Carillion’s opportunistic timing – most acquisitions are timed to save the buyer money.
But Balfour is on stronger ground in suggesting Carillion’s planned slimdown of its construction business in the UK after a takeover could mean its shareholders missing out on the benefits of a nascent sector recovery. Getting off the escalator when it is going up, so to speak.
In contrast, it looks like Carillion sees the main prize in being a bigger, stronger international group better placed to bid for major contracts.
There looks no accommodation here. Carillion has to decide whether it is prepared to go hostile or not.