WHAT with currency wars to the north and floods to the south, it was little wonder that the week’s most interesting economic news got so little mention.
Namely, the Bank of England has bumped up its forecast for economic growth this year to a thumping 3.4 per cent.
That beats all but three years in the past quarter century, and is way above the 2.6 per cent post-war average. It also leaves America (2.8 per cent) and Germany (1.8 per cent) trailing.
The new UK growth forecast came just in time to hide any embarrassment that Mark Carney, governor of the Bank of England, might have felt about summarily binning his promise to link future interest rate policy to the level of unemployment. Carney’s reputation is linked with “forward guidance” – the idea that central banks can influence (positively) the behaviour of markets by making clear commitments regarding how they will behave in the future.
Carney’s promise to freeze interest rate levels until unemployment falls to circa 7 per cent – made only last August – is now toast. More than half a million jobs have been created since then, implying the Bank should be considering a rate rise. But Carney has no intention of doing that, so welcome to Forward Guidance Mk II. Rate changes will now track the level of spare capacity in the economy. Only when capacity tightens will the Bank consider a rise.
The advantage of this nebulous benchmark is that economists have never been able to agree on how to measure spare capacity, so you can make it anything you want. Carney says the level of genuine unemployment (i.e. spare labour) is higher than officially recorded, because many part-time workers are under-employed. He may be right. But his policy anchor has now become dangerous vague.
With growth stratospheric, I doubt if anyone will worry too much during 2014. Plus Britain’s safe haven status is pushing up sterling and thus lowering inflation, which means the Bank is under no pressure to raise rates quickly.
Yet it is hard to believe that above-trend growth can be maintained indefinitely without the Bank being forced to blow the interest rate whistle. Soon the markets will wake up to the fact that Carney’s new forward guidance rules are made of elastic. What then is the use of forward guidance?
Flood costs may hit every household in UK
THE New Orleans economy has bounced back from the epic inundation of 2005. Tourism is being replaced by high tech and offshore oil. There’s only one problem: the massive hike in home and business property insurance rates. For businesses, we are talking rises of 2,000 per cent, not 200 per cent.
From 2015, every UK homeowner (not just those in flood zones) will be forced to pay a hike in premiums to cover the next flooding bill, as a result of the UK government’s new cross-subsidisation insurance scheme, Flood Re. But Flood Re may fall foul of European Union rules. The scheme also excludes small businesses and shops that are the lifeblood of flooded villages.
Flood Re is a sop. Without some kind of public intervention, UK flood insurance premiums will go the way of New Orleans.
The loss of value to under-insured properties could reach a staggering £4.3 trillion. Even a fraction of that will impact on consumer spending. What was that about money being no object?