NEW Bank of England Governor Mark Carney has delivered an object lesson in the power of words.
Without actually doing anything – interest rates are unchanged at 0.5 per cent and there is no increase in Quantitative Easing – the statement yesterday at the end of his first meeting as chairman of the Monetary Policy Committee that interest rates were likely to stay low longer sparked a 3 per cent rise in the FTSE100 Index and a sharp fall in the pound.
The weapon Mr Carney has brought blazing to the front line of monetary policy is “forward guidance” – providing markets with explicit statements about the Bank’s thinking on the interest rate outlook and its future plans. In this way it aims to reduce uncertainty over rate policy and halt an upward drift in longer term rates.
“Forward guidance” is one of two novel phrases Mr Carney has brought to the lexicon of the central bank. The other, closely linked, is “escape velocity” – achieving a momentum towards sustainable recovery.
What gave the bank’s statement particular resonance yesterday was that expectations of an early rise in interest rates had been building since warnings from US Federal Reserve chairman Ben Bernanke that he would be looking to taper the Fed’s policy of monetary easing later this year and to end it in 2014. This sparked sharp falls in financial markets with longer-term interest rates to rising, here and in the US. Mr Carney’s guidance, delivered through the MPC, reminded markets the UK recovery “remains weak by historical standards and a degree of slack is expected to persist for some time … the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy”.
Share prices immediately rallied while traders who had been counting on an early rate rise sold sterling. This move alone should give assurance and encouragement to UK exporters.
However, the policy of forward guidance is not without its risks. The UK, being a particularly open economy, is vulnerable to changes in global sentiment and the new tactic could leave Mr Carney a hostage to fortune if the pound falls too sharply. It could also leave the UK economy vulnerable to higher inflation, at 2.7 per cent already running well ahead of the two per cent target rate. News from the Halifax that UK house prices were 3.7 per cent higher on last year will raise fears prices are being artificially driven higher by unsustainable low-cost borrowing. Arguably the biggest concern is that continuing reliance on emergency low interest rates will deepen dependence on cheap money. For now, however, Mr Carney’s remarkable verbal stimulus should give a welcome boost to business and household confidence – a vital precondition of “escape velocity”.
Change tack on town centres
Our high streets and town centres have been hit by two convulsions: a cyclical, but severe spending downturn in the recession following the banking crisis; and a profound structural change in shopping and spending habits with the rise of e-commerce and internet shopping.
Coming on top of the continuing growth in out-of-town shopping centres, these powerful forces have combined to force an unprecedented spate of shop closures and a clear deterioration in our town centres.
It is against this background that the National Review of Town Centres, commissioned by the Scottish government and chaired by architect Malcolm Fraser, has called for a radical rethink. Its broad suggestions are welcome and constructive. It calls for a “town centre first” principle by which public bodies and housing providers are urged to consider the impact of future development on town centre footfall and trading.
And it seeks to broaden the appeal of town centres through a mix of facilities for new housing, leisure and entertainment, restaurants and places for social activity – a more mixed approach now widely recognised.
But other changes, too, are necessary. Business rate policy must reflect the huge challenges and cost burdens faced by smaller high street retailers. Rates do not reflect the sharply lower trading of many outlets.
National policy could usefully move to a more level playing field on tax: out-of-town mega stores are new-build and free of 20 per cent VAT while town centre shop refurbishment is subject to VAT. If policy is to encourage a town centre renaissance, this must change.