Comment: ‘Nuanced’ is the new guidance

FORWARD guidance on interest rates is not dead. Governor Mark Carney’s signature policy just had a bit of an unemployment shock and has had a salutary lie-down in the Bank of England monetary policy committee’s (MPC) dark room. Now it feels refreshed enough now to give us lots more guidance.

Martin Flanagan
Martin Flanagan

To wit: don’t expect historically low base rates of 0.5 per cent to go up soon, and even when they do they are likely to remain significantly below pre-crisis average levels of 5 per cent for quite some time.

That is continuing bad news for Britain’s savers and good news for borrowers and businesses. In short, even though the economic recovery is becoming entrenched, it is still too unbalanced and based on consumer spending, says Carney, to risk spoiling everything with precipitate monetary tightening.

In the same vein, the Bank of England pumping money into the economy via the buying of government gilts is also likely to continue, at the very least until the first, eventual rate rise.

With hindsight, it was probably a mistake, and definitely an embarrassment, for the new governor when he ushered in forward guidance last summer and linked the consideration of monetary policy explicitly with getting the unemployment rate down to 7 per cent.

The jobless total then spiralled downwards far faster than expected by either the Bank or a panoply of pundits, and is now likely to hit 7 per cent this spring compared with earlier central bank forecasts of 2016.

Perhaps with a nod to economic totem Maynard Keynes’ contention that, when the facts changed he changed his mind, Carney now says the Bank will have to be more “nuanced” in its future guidance.

This means the MPC will take into account a far wider range of factors than just unemployment when deciding the time is right for base rates to rise.

Crucially, Carney says the mixture of forecast benign inflation and there remaining plenty of spare capacity in the economy means the Bank has time to absorb this slack before it has to turn its attention to raising interest rates.

The governor does not deserve to be overly criticised for a realignment of forward guidance. It exercises economic anoraks, but is really a bit theological.

Carney got it wrong, but only because the economy is in a much better position than expected last summer. Would we prefer the governor to have been right in his caution on the nascent recovery and we were in worse economic straits now?

Not infrequently it is better to be lucky than right. And we could do worse than to have a lucky governor in Threadneedle Street after six years of crisis.

Private equity circling at wounded Morrisons?

SUPERMARKET giant Morrisons is trying to make up for lost time in online and convenience stores. But will chief executive Dalton Philips be given the time to complete the job?

The market buzz is that the founding Morrison family, which still holds some 9.5 per cent of the stock, is sounding out private equity to discuss taking the business private again. It would be a turn-up for the books, but not inconceivable.