For example, the result of his first monetary policy committee (MPC) meeting was to hold interest rates at 0.5%, a level they have sustained since March 2009 so nothing new or different here. What is, however, is the additional statement that Carney issued alongside the decision to do nothing different.
Doing nothing still a choice
“At its meeting today,” he said, on 4 July, “the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report.
“The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.”
One comment in his statement stands out, that is Chancellor George Osborne’s request for the MPC to “provide an assessment, alongside its August inflation report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds.”
By “forward guidance” – a policy he used in Canada – he is being asked to indicate whether or not interest rates will remain at their current level for an extended period of time.
The August inflation report and accompanying statement will be scrutinised far more closely than most inflation reports. In particular, commentators will be looking for clues as to whether or not he will unveil other changes he has been associated with, such as introducing a Fed Reserve-type threshold targeting that, currently, will keep US interest rates close to zero until unemployment falls below 6.5 million.
His first MPC meeting was always going to pass off without any great change – QE remains at £375bn – though he is known as an innovator so we can expect further indications of change, if not change itself, in August.
Forward thinking
For example, Guy Foster, Brewin Dolphin’s head of portfolio strategy, says: “With a background in regulation as well as monetary policy, we expect Carney to focus on allowing banks to rebuild their capital while finding ways of enabling them to keep providing funds to the economy – the illusive balance.”
What else he might bring to the party is, again because he has only served five days of his five-year stint, too early to spot though there are early indications of what he could do – gilt purchases, buying private sector securities, additional credit easing initiatives, policy commitment/guidance strategies and cutting interest rates.
According to Mark Allan, senior economist at Axa Investment Managers: “Of all these options, Carney’s clearly expressed preference is for interest rate policy guidance, a tool with which he has prior experience of.”
August might be too early, but putting two and two together, we can expect “fourward [Ed: sic,with apologies…] guidance” sometime soon…
