In 12 months he has done his fair share of talking about the overheating housing market, including helming the Bank’s Financial Policy Committee’s Stability Report with measures announced yesterday to cap mortgage borrowing.
Carney has also arguably been a bit of a tease when asked to comment on the Bank’s forward guidance, having been accused by some of sending out ‘mixed messages’ on policy movements after his recent Mansion House address and Treasury Select Committee (TSC) hearing.
Should we expect an interest rate rise sooner rather than later? I for one am not sure where consensus sits today and we all know how markets hate uncertainty.
“Despite its protestations, the Bank of England has significantly overestimated the level of clarity that the market and consumers have on its strategy around interest rates,” asserts Chris Williams, CEO of Wealth Horizon.
A U-turn?
“The MPC was initially taken aback by the degree of certainty from the market as to when the first adjustment to interest rates might happen and then the Governor appeared to U-turn on his Mansion House speech in the TSC hearing. These actions are all symbolic of the mixed messages and confusion being fed into the market.”
He adds: “We need to ensure clarity of expectations, something that the TSC was asking for, but I'm not sure that is what the country is getting."
However, a lack of clarity is something not seen by Fidelity Worldwide Investment’s director of asset allocation Trevor Greetham, who believes Carney has actually issued “powerful” forward guidance, widely reported as a promise to keep interest rates low for three years.
“This, coupled with direct government support for home buyers, triggered a strong housing-led recovery,” he reports.
“The rest is history. The economy has grown by more than 3%. The pound has in fact been one of the strongest major currencies, rising by more than 10% against the dollar.”
Doves and hawks
Greetham sees the markets as grappling with the possibility of a base rate hike by Christmas: “When Mark Carney came to office people thought of him as a dove. At the Mansion House, less than a year later, he was a hawk. This is the irony of forward guidance: if it is effective, you end up breaking your promises.”
Having listened to former Governor Lord King speak about the abnormally slow economic recovery at our Portfolio Adviser UK Congress UK 2014 last week, I have no doubts about the enormity of the job ahead for Carney and co.
With inflation well below the Bank’s 2% target – at its lowest point for over five years – and with the big base rate decisions to come, the next 12 months promise to be the Carney’s toughest test yet.
