Mark Carney, governor of the Bank of England, is appearing before the House of Commons Treasury Select Committee for the first time since he introduced his forward guidance, which states that interest rates will stay at their current low level at least until unemployment falls to 7 per cent. The BoE said in August it does not expect this to happen until mid-2016 but the markets are increasingly pricing in an interest rate rise at the end of 2014 or early 2015.
By Claire Jones and John Aglionby
Good morning and welcome to this live blog.
Chris Giles, FT economics editor, says Mark Carney is giving evidence to the Treasury Select Committee facing a similar level of pressure as he did in his appointment hearing as BoE governor in February.
Then the question was whether this Canadian import was worth the huge increase in salary the government was offering. Now, the question is whether his big “forward guidance” idea is working.
The BoE, which has chosen not to stake money on its guidance, has done little in recent weeks to argue back against market participants who do put their money where their mouths are.
As an indication of the likely hearing, David Miles, an external MPC member who is also giving evidence today, said on Wednesday that the criticisms of forward guidance – in not persuading investors – was “bizarre”. He was speaking at an academic conference at Queen Mary’s University of London, in which I shared the platform as a panellist. It is fair to say that I was more sceptical of forward guidance in practice and my impression from the questions was that the professors present were generally less than convinced by the BoE’s argument.
Among other things they worried that unemployment was an unreliable indicator of slack, that there was no pre-commitment in the guidance so it was meaningless and that it might persuade the public to over-extend themselves on borrowing in the false belief that rates would stay at 0.5 per cent for three years. David Miles gave a good defence but my sense was that he did not win over a sceptical audience.
Mark Carney therefore has to do better today or people will begin to wonder in public what all the fuss was about.
Mike Hunter, from the FT’s markets team, writes:
As the committee gathers in the Thatcher Room in the House of Commons, sterling is at $1.5793 against the dollar, down 0.1 per cent on the day. It is flat against the euro, with the shared currency worth 84.23p.
If you want to watch the committee hearing, it’s available here:
Carney is due to begin speaking shortly. Appearing alongside him are three of his fellow MPC members: Paul Fisher, executive director for markets, as well as two external members, David Miles and Ian McCafferty.
The governor notes that, while market participants might not be buying the BoE’s line that unemployment will take until mid-2016 to fall from 7.7 per cent to 7 per cent, analysts believe them.
“Those who forecast unemployment have actually pushed out their expectations,” he says.
Carney is asked about the long rate. He says:
“The long rate is not the most important rate for households and businesses in the UK. Roughly 3.4 of people and business who are borrowing are on a floating rate and that is tied to the Bank rate.”
Carney: “We expected this to provide more effective stimulus by providing greater transparency. This affects decisions of businesses and households.”
Carney: “You would have to conclude that many in the markets believe the threshold conditions will be achieved sooner [than our forecast].
What’s important is that this is about the conditions in the economy when the MPC will consider tightening.”
Carney says inflation target is still 2 per cent
Carney: The question is how do we return to 2 per cent in a way that supports employment.
Carney: “We thought it was important to provide maximum transparency on how to get from where we are to 2 per cent.”
The governor says he thinks businesses and households get the message on guidance. “It’s a clear message: until we see unemployment hit 7 per cent we’re not going to consider raising rates,” he says.
Treasury Committee chairman Andrew Tyrie asks: “What about the three knockouts?”, the caveats on price and financial stability which many think have led to the message on guidance becoming garbled. Carney notes that he doesn’t think the public thinks the BoE has gone soft on inflation and says the most recent inflation expectations poll showed inflation expectations among the public had fallen.
Carney: The inflation target is 2 per cent. In terms of if one of the knockouts were to be breached, the MPC would have to take a decision based on the reason for that knockout being breached.
Andrea Leadsom MP switches the questions to Ian McCafferty. He thinks the inflation knockout is crucial to the design of the guidance.
David Miles agrees. “Hitting the inflation target remains the centrepiece of monetary policy…It’s a pretty important part of the whole guidance,” he says.
Carney asked if he’s worried about a run on the bond market. He says he accepts people in the markets will take different views and that’s a “continuous evolution of views”. The new policy is all about moving away from a “black box” MPC that suddenly comes out with a new policy.
Here are the three knockouts:
Bank of England: The guidance linking Bank Rate and asset sales to the unemployment threshold would cease to hold if any of the following three ‘knockouts’ were breached:
• in the MPC’s view, it is more likely than not, that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target;
• medium-term inflation expectations no longer remain sufficiently well anchored;
• the Financial Policy Committee (FPC) judges that the stance of monetary policy poses a significant threat to financial stability that cannot be contained by the substantial range of mitigating policy actions available to the FPC, the Financial Conduct Authority and the Prudential Regulation Authority in a way consistent with their objectives.
Carney on asset sales: Our exit strategy from QE is that we’d look to adjust base rates first before making asset sales
Chris Giles, FT economics editor, tweets from committee room:
Andrea Leadsom has often asked about the risks of the BoE making big losses on QE when it sells gilts, given that it owns about a third of the outstanding stock. If the BoE makes a loss on QE, Mr Carney notes that transparency helps. He also says: “We wouldn’t be foolish enough to sell our entire APF at any one time.” APF stands for Asset Purchase Facility, and is BoE lingo for its QE operation.
Carney: “The message to your constituents is that we will not consider tightening until unemployment falls to 7 per cent.”
Carney: “We are not currently engaged in additional quantitative easing. What we have said with the guidance is that we won’t reduce the stock of assets in the APF. We have not taken a decision to add to the stock of assets for various obvious reasons – the economy is picking up.”
Chris Giles, FT economics editor, is not impressed by Mr Carney so far:
Now to the dissenting vote. Carney notes that dissenter Martin Weale is still bound by the terms of guidance, despite not agreeing to the terms of one of the inflation knockouts.
Paul Fisher says Weale was “the only one” concerned about the knockout saying guidance will be reviewed only if inflation looks like it will breach 2.5 per cent, as opposed to the 2 per cent inflation target. Fisher suggests that 2.5 per cent was used because of inflation shocks and because inflation now stands at 2.8 per cent. “There’s always the risks of further shocks,” he says.
Tyrie doesn’t like this. His questioning suggests he thinks using 2.5 per cent means the BoE has gone weak on inflation.
Stephen Smith from the FT’s markets team:
More from Chris Giles, FT economics editor:
This is interesting. Will new MPC members automatically be bound by guidance? The governor’s response suggests not.
“New members will need to declare whether they are operating under the forward guidance… That member should indicate if he is operating under forward guidance….I wouldn’t presume to dictate to new members,” he says.
Within a year, we’ll get two new deputy governors and could well get several new external members before 2016.
The governor has made clear this morning that the BoE is looking to influence shorter-term interest rates. He is less fussed about longer-term rates such as the yields on the government’s benchmark ten-year gilts, which is lucky given that this rose above 3 per cent for the first time since July 2011 last week.
Carney admits a run of good data and discussion on Fed tapering has affected interest rates and that the longer end of the yield curve is rising
Carney says MPC has not tightened monetary policy but a “benign” rising of the yield curve has occurred
Carney: “For long term capital investment, that we want in this economy, we want projects based on an expectation of positive long-term interest rates.”
Carney’s stab at explaining why rising longer-term rates are a good thing is not convincing Chris Giles:
Carney says MPC has made clear that there’s another inflation knockout, what happens to inflation expectations. And there’s been no change there.
“We’re on a path to move from these historic high rates to a rate that supports the economy”.
Carney: “If we prove to be incorrect on the medium term rate of unemployment, that is 6.5%, this would show up in inflation and that would have an impact on the stance of monetary policy.”
Carney says 35% of those that are unemployed are long-term unemployed, compared to the historic rate of 20%. So less slack, compared to the historic rate.
Carney’s point on higher longer term rates not necessarily undermining the message on forward guidance hinges on the fact that a rise in longer-term gilt yields will naturally as confidence in the economy grows. That may be so, but it seems this message is not getting through to Jesse Norman MP, who is quizzing him at the moment.
Carney says forward guidance developed over a course of July and into the August meeting. There was a series of meetings.
“I am entirely comfortable with the policy that was adopted.”
How transparent is Carney’s “maximum transparency”? Chris Giles, FT economics editor, is not sure:
More from Mike Hunter, on the FT’s markets desk,
“As currency traders track Mr Carney’s words, the pound is drifting higher. It’s at $1.5818 against the dollar, up 0.1 per cent on the day – hardly a big move, but stronger than the $1.5793 seen before the start of the hearing.”
The governor is at pains to point out that there was a lot of discussion about how guidance would be formulated among MPC members.
“We debated whether the measure should be based on unemployment or the output gap,” he says. “How I view working in a committee is it’s not to show up and give a binary option. it’s to benefit from that expertise [on the committee] and build as much consensus as possible.”
Andrew Sentance, former MPC member tweets:
More from Chris Giles, FT economics editor,
Carney asked why he said policy was “more effective” rather than a tightening or loosening… TSC wants clarity!
Tyrie is giving Carney a hard time here. He doesn’t think the message on guidance is nearly clear enough.
After the governor swerves a question about whether monetary policy has been loosened by guidance, Tyrie says: “It’s going to be pretty tough at the Dog and Duck working out whether this policy has loosened or tightened,” he says.
Carney says when he was at Bank of Canada he issued time-contingent guidance.
“The distinction here is we haven’t given calendar guidance. We’ve described the conditions in the economy that have to happen for us to adjust policy. The message to businesspeople and to individuals until we see growth in the economy.”
“The approach we took here was the right approach for the UK given the state of the recovery and where the uncertainties lie.”
More from Andrew Sentance, former MPC member:
Mark Carney says the BoE’s “contacts” say more clarity on how monetary policy works has been provided by guidance. Hmm…
He tries to apportion some of the blame for the rise in longer-term yields on the Fed, noting that the rise in governments’ longer-term borrowing costs has occurred globally.
Carney says one of the great uncertainties is the path of productivity. This will make a big difference to the recovery.
“We have as a central tendency in our forecasts, a 1.8% per anum growth in productivity – a relative modest forecast.”
Carney believes that the UK has a big problem with underemployment – that those in work would like more of it.
“There’s people not working as much as they want to in this economy,” he says. This is one of the reasons why the BoE thinks that it will take so long for unemployment to fall to the 7 per cent threshold.
Professor Miles: A bit of overreaction in the market [to forward guidance]. “The weight of betting in the market is that we’ll reach 7 per cent faster than I think we will.”
Carney agrees, citing low productivity.
“One of the key questions here is how the rate of productivity picks up in comparison to the pick-up in demand.
Fisher agrees. “In some ways, a fall in unemployment is good for the people who get jobs but not necessarily for national income.”
McCafferty also agrees.
Carney says that what the BoE provided on medium expectations on inflation is a variety of measures . “We also look at changes in those levels or if they become more sensitive to economic news.”
The hearing has been going on for just over an hour. So far, it’s not going that well for Carney.
The governor’s defence of forward guidance has managed to win over neither the MPs in the room nor, judging by the twittersphere, those watching.
There’s a lot of complaint that the message that the BoE intends to keep interest rates on hold at least until unemployment falls to 7 per cent has been garbled.
The governor’s point that the BoE is focusing on shorter-term rates and is not particularly concerned by the rise in gilt yields hasn’t been well understood.
In 29 out of the last 32 quarters, MPC has underforecast inflation, TSC says. A pretty one-sided imbalance
“We will not take risk with inflation expectations.”
Top tip from Sky’s Ed Conway:
Carney attempts to appease the hawks: “I’m not afraid to raise interest rates. I’m the only G7 governor who has raised interest rates.”
He would raise interest rates first, rather than sell gilts, if monetary policy needed to tighten. Paul Fisher explains why.
Asset sales could, Fisher says, disrupt the gilt market if they were used to tighten monetary policy. Any asset sales would be a longer-term programme so as to not spook the gilt market. “That’s the thinking at the moment,” he says.
Re poor BoE forecasts in the past…. Chris Giles, FT economics editor, tweets:
Good question. Does the governor think the chancellor was right to get the bunting out and declare victory on the economy?
Carney dodges it, saying for obvious reasons he doesn’t want to get involved in a political debate: “We have a recovery. We have data that there’s a broadening and strengthening of the recovery. But it’s early days and it’s a long way to get back to the potential of this economy.”
Carney is asked about the housing market. Puts on Financial Policy Committee hat.
He says banks would need to do more intensive supervision of lending, if a bubble starts to appear. Can extend this to banks having to hold more capital against certain types of mortgages. And in the middle, the FPC could give advice on loan to income ratios.
Housing market needs to be put in perspective, Carney says. Activity levels and mortgage applications across the country are still in the range of 2/3s to 3/4s of pre-crisis levels.
The governor spent part of this morning attempting to convince the TSC that he understands what it takes to make decisions by committee. However, the BBC’s economics editor notes that his personal pronouns have betrayed him:
Carney now asked about the variability of labour market across the country.
“We are aware and certainly look at the differences in unemployment. We have to set policy for the United Kingdom as a whole. The point at which unemployment reaches the 7 per cent threshold, we would look at a number of variables.”
Chris Giles, FT economics editor, thinks Carney might need a geography lesson…
Some light relief in the form of a question on the possible introduction of plastic banknotes: “The introduction of these notes in Canada has proven popular,” Carney says. “They are cheaper and more durable and more environmentally friendly.”
The TSC requests samples. On cue, Paul Fisher whips out a few plastic notes from his pocket.
BoE is asked about asset purchases. The money is being reinvested across the curve, Paul Fisher says, adding that the committee doesn’t want to twist the curve.
David Miles explains why weak productivity means unemployment will take longer to fall to 7 per cent. “Productivity is extraordinarily weak. I suspect a lot of that is because we haven’t had a recovery,” he says, adding that because productivity will improve as demand improves, the fall in unemployment would be a bit lower than in normal times.
On household balance sheets, Carney says there has been some positive progress.
“That said, there are pockets of vulnerable households with high indebtedness. What’s crucial is what happens in employment and wages.”
Carney gives a one-word answer! Yes, there are a good number of households that will feel strain, re indebtedness, when interest rates start to return to “normal” levels
“Guidance gives visibility to the point at which [decisions on interest rates] need to be taken,” Mr Carney says, adding that he thinks using the unemployment target helps in this respect.
The MPs fire back: “Do you think that people watch the unemployment rate?” We shall see, the governor responds.
Ian McCaffery, former CBI chief economist, is asked about business conditions. He says the MPC is starting to see a pick-up in confidence. “The tone of the conversations we’ve had have started to improve,” he says. A pick-up in business investment is still to come, though.
David Miles accepts many companies are not wanting to borrow at the moment. But he says the availability of financing is starting to improve. Now only two or three people out of 10-12 think the unavailability of financing is the most important thing, compared to almost all about three years ago.
David Miles says the funding for lending has had some positive impact and wouldn’t want to wind it down, for confidence reasons if nothing else.
Carney is asked about whether banks would lend more if capital requirements were loosened. He replies by saying, probably but only by a third of the amount of the loosening.
Tyrie ends by shifting the focus back to transparency. He wants to see how each of the MPC members interprets knockouts. Carney says this is possible. The FPC will also detail how it interprets the financial stability knockout in its forthcoming records.
That’s it for the questions. Wrap-up to follow.
Chris Giles, FT economics editor, stands corrected on Carney’s need for a geography lesson
Mike Hunter, from the FT’s markets desk, says the pound moved a bit during the hearing but ended up not a million miles from where it started.
Sterling is currently at $1.5806, up from the $1.5793 seen before the policymakers spoke to MPs, but down 0.1 per cent on the day. At its peak during the hearing, the pound was at $1.5825.
Carney’s two-hour grilling has not been a disaster. But neither did he fully grasp the opportunity to counter the guidance sceptics.
At the beginning of the hearing, the Treasury Committee wasn’t convinced. The governor did little to change its view.
Nor did the MPs seem to buy that the rise in longer-term borrowing costs was a measure of the success of guidance in assuring markets that the BoE would engineer a recovery. Or that much of the rise in yields could be attributed to the US Federal Reserve’s plans to soon begin tapering its bond purchases.
Carney was non-committal on whether the economy had turned a corner, as the chancellor has claimed in recent days. Carney was adamant that he was willing to react whichever way the economy went, raising rates if necessary. Neither would he give a straight answer on whether guidance was in effect a tightening or loosening of policy. It was, he said, just a way of making policy more effective.
Yet, despite the scepticism among MPs and markets, the governor claimed guidance, his big idea to save the UK economy, was working.
That’s it from us. Thanks for following.