What Mark Carney Isn't Writing to Philip Hammond

(Bloomberg Gadfly) -- U.K. consumer prices rose by 3 percent in October, figures released on Thursday showed. That's a whisker away from missing the inflation target by more than 1 percentage point, which in turn would oblige Bank of England Governor Mark Carney to write to Chancellor of the Exchequer Philip Hammond to explain the overshoot. We at Gadfly have taken the liberty of drafting the missive for Carney, just in case.

Dear Chancellor Hammond,

I'm assuming you're still at your post by the time this letter reaches you and that Boris Johnson and Michael Gove haven't persuaded the Prime Minister to ditch you for being too wet on Brexit. (If I'm wrong, well, good day to you, Chancellor Rees-Mogg. You'll have my resignation letter this afternoon.)

The last time I wrote to you, in December of last year, it was to explain why inflation was more than a percentage point below target. That followed a similar letter in August 2016. And one in May. And in February, and November 2015, and August 2015, and… well, you get the picture.

As I explained almost a year ago, declining food prices were the single biggest factor behind the undershoot that saw consumer prices rise by just 0.9 percent in October 2016. What a difference a year makes.

What Mark Carney Isn't Writing to Philip Hammond

I blame Greggs Plc. The bakery chain is charging an outrageous 24 pounds for its first Christmas advent calendar; that seems rather a lot for a set of sausage roll tokens and mince pie vouchers. Anyway, inflation is finally back, so I'm obliged to explain what we're doing to bring it back into line over the policy horizon.

Well, the outlook for rising prices gave me an excuse to dragoon the majority of the Monetary Policy Committee into raising interest rates at the start of this month. For me personally, that eradicates the risk that I'll leave this office without ever having had the opportunity to press the "higher borrowing costs" button -- unlike the fate likely to befall Mario Draghi at the European Central Bank in Frankfurt.

Given the symmetric nature of our inflation targeting, you might ask why we're not happy with consumer prices finally overshooting after all those months of threatening to drag us into deflation. Well, the smokescreen we're using is that the decline in unemployment to its lowest level in 42 years is bound to eventually force wages higher -- the key words there being "bound to" and "eventually."

What Mark Carney Isn't Writing to Philip Hammond

Of course, no-one is buying that story. Our forecasting record on incomes growth is about as reliable as General Electric Co.'s dividend.

The honest truth is that there are only three things that matter for Britain's current economic outlook: Brexit, Brexit and Brexit. And if things go as badly as I fear, the pound could start to make Bitcoin look like a reliable store of value.

So the real reason we raised rates two weeks ago was to give us some elbow room to cut them again if we end up with a cliff-edge Brexit scenario, crashing out of the European Union with no deal and about to get sued for an exit bill in the region of 60 billion euros ($70 billion).

If it seems perverse to raise borrowing costs just so we can cut them again if need be, picture the scene if we were forced to go negative on rates. Your boss Theresa May would be apoplectic about the impact on savers. At least now we have two potential rate cuts available if things continue to deteriorate in the negotiations with the EU -- and I can finally put those "unreliable boyfriend" headlines to rest once and for all.


Mark Carney

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

To contact the author of this story: Mark Gilbert in London at magilbert@bloomberg.net.

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