Bill Jamieson: Mark Carney’s parting shot on interest rates

Mark Carney's advice was treated as a contrary indicator by wags. Picture: Kirsty Wigglesworth/Getty

His comments sent sterling down to a near two-week low against the US dollar as he outlined a debate on the Monetary Policy Committee about whether interest rates needed to be cut now. Shares in the FTSE 100’s large contingent of overseas earners were supported by the pound’s fall.

So much for the sunny optimism of recent weeks from Prime Minister Boris Johnson. Nor has Downing Street been alone. A survey of top finance directors by accountancy giant Deloitte showed the biggest jump in confidence on record after the election broke the Brexit deadlock and ended the threat of a far-left Corbyn government.

Business confidence tracked by the survey is now at its highest in the 11 years that Deloitte has been conducting the survey, with a 9 per cent jump in the final three months of the year compared with the previous quarter.

Combined with news of a surge of overseas money into UK equities since the election result, there is good reason to expect a recovery in business investment and expansion – and a sharp upturn in borrowing.

Nor is Scotland missing out. Latest figures from Scottish Development International last week showed we are set for another bumper year of foreign direct investment (FDI). Figures for 2018/19 showed more than 10,000 planned jobs had been generated by FDI projects into Scotland – a rise of 18 per cent compared with the previous financial year. The figures back up the EY Attractiveness Survey showing that Scotland remains the leading UK location outside of London for FDI.

But a post-Brexit business revival is not quite how the Bank governor sees it.

While he set out some reasons for optimism, markets honed in on his comments about a possible rate cut, which he linked directly to the current economic outlook – whereas previously he talked about cuts more as a contingency.

Now it is fair to note that Carney’s prognostications on interest rate movements have not always been borne out. Time and again his forays into “forward guidance” have gone awry. Frequent warnings of a rate increase on the near horizon have turned out to be false – so much so that some wags have treated them as a contrary indicator. “Forward guidance” duly became infrequent as rates, instead of rising, remained persistently low. Now that he has hinted at the possibility of a rate cut, might a rate rise now be more likely?

There is certainly cause to be wary of recent optimism. Last month and in November, two of the nine policymakers on the BoE’s interest rate-setting committee voted to cut interest rates to 0.5 per cent from 0.75 per cent, though Carney himself backed keeping rates on hold.

Britain’s economy grew at its joint-weakest annual rate since 2012 late last year, and many indicators remain downbeat despite signs of optimism following Johnson’s landslide election win. Overall, say analysts at Scotiabank, Carney’s signal of a combination of conventional and unconventional tools would equate to around 250 basis points in cuts.

British government bond yields have also fallen. Money markets currently price a roughly 60 per cent chance of a 25-basis point interest rate cut by the year-end. This compares with just over 50 per cent at the end of 2019.

The latest downbeat data for the UK is most evident in our high streets. Shoppers cut back on spending in late 2019, rounding off the weakest year since at least the mid-1990s for retail sales.

The British Retail Consortium said sales fell for the first time in 25 years last year, marking the first annual sales decline since 1995. Sales in November and December were particularly weak, falling 0.9 per cent. A separate report from Barclaycard found a rise in consumer confidence had failed to boost festive spending.

Investors are also looking ahead at the challenges Britain and the European Union face in agreeing on a new trading relationship, after the UK parliament voted last week on Johnson’s withdrawal deal. Attention is shifting to what Britain’s future relationship with Europe will look like when it begins an 11-month transition period.

Meanwhile, latest purchasing managers surveys point to a continuing activity slowdown through December. The construction sector PMI for December shows activity contracting for an eighth month running and at a deeper and sharper rate'.

It revealed contraction occurring across civil engineering – the deepest since March 2009 – and in the commercial and house building sectors.

Worryingly for near-term activity prospects, new orders contracted for a ninth successive month, the longest run of declines since 2012-13.

And in the manufacturing sector, there was disappointment that the final PMI for December did not show a stronger upturn in the final weeks of the year. Activity contracted for an eighth month running in December and at the second fastest rate (after August) since July 2012.

Weakness was most pronounced in the investment goods sector, where output fell at the fastest rate for 89 months and orders fell markedly, adding to evidence that businesses continue to hold back on investment. There was also contraction in output and new business in the intermediate goods sector. Another sharp drop in new orders bodes ill for output prospects in the near-term at least.

The survey added to the overall evidence that the labour market has lost overall momentum since the middle of 2019. Manufacturing employment contracted for a ninth month running in December, albeit at a reduced rate.

So it may not be until the spring that a sustainable improvement can be discerned – and with it a more accurate assessment of likely trends in monetary policy.

But by then Carney will have gone – he steps down as governor at the end of this month after six years to be succeeded by Andrew Bailey, current head of the Financial Conduct Authority and formerly Bank of England chief cashier. “Forward guidance” will have a quiet funeral, no flowers by request.