7 Aug 2015

Was the Governor flip-flopping on interest rates?

The Governor was curt yesterday when I asked him about his remarks in a speech in Lincoln a couple of weeks ago and what materialised from the minutes of the MPC meeting and the inflation report.

Bank of England Governor Mark Carney speaks during an inflation report news conference at the Bank of England in London

I simply asked him if he stood by what he said about the potential for rates rising at the end of the year while all the evidence suggested that rates would now not rise until the second quarter of next year. Didn’t those two things paint a slightly confusing picture?

After stating that I should actually read his Lincoln speech, Mark Carney said: “I didn’t say rates increase around the turn of the year, I said that the decision around that comes into sharper relief” around the turn of the year.

For what it’s worth, I had not reported him as saying rates would increase around the turn of the year merely that there was potential for that to happen.

Yes, mine was indeed a summary of his actual words but to be fair most economists – and sterling traders for that matter – interpreted his Lincoln speech in exactly the same way. Wasn’t this what Super Thursday was all about?

Yet Mr Carney insisted there was no inconsistency at all.

What was perhaps more telling in his answer to me was this, slightly more indecipherable, response.

“The forecast of the MPC which takes into account a variety of things….does not deliver a sustainable return of inflation to target. It brings inflation back to target in two years but it then overshoots.

“The economy then moves into excess demand. And so the judgement that has to be made individually and ultimately collectively by members of the MPC is, all things being equal, how would one adjust policy in order to have policy slightly tighter than where the market is.

“Which can be an adjustment in terms of timing of the start of rate increases or the accumulative amount of rate increases. And those are judgments that we’ll make.”

In other words – and this is important – what Mark Carney is saying is that in order to stop inflation overshooting the target 2 per cent rate in 2017 (because the economy is growing too fast) we might have to start raising rates more quickly or more steeply than yesterday’s inflation report would imply.

In other words, what he said in Lincoln is still true and consistent, he believes, with what was said yesterday.

So we may yet see interest rates rising by the end of the year. Not to get inflation back to target but to stop it overshooting the target.

Confused? I rest my case.

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