Mark Carney Is in Far Too Much of a Hurry
(Bloomberg Opinion) -- Mark Carney, the Bank of England governor, told Bloomberg Markets this week that predicting the pound would fall after a leave win in the Brexit referendum was “probably the easiest call” in the past 25 years of macroeconomics. Sadly for him, setting monetary policy ahead of Britain’s departure from the EU next March is proving much harder.
The Bank is flip-flopping its way toward a gradual tightening. Its Monetary Policy Committee raised interest rates last November for the first time in a decade, as it withdrew some of the stimulus injected after the vote. The British economy then hit a soft patch in the first three months of 2018, putting further hikes on hold. But the MPC is expected to raise rates again this week, from 0.5 per cent to 0.75 per cent.
This upward march looks very hard to justify. In theory, there are two explanations offered by its supporters: The winter slowdown was an aberration and the economy is running out of slack — which is creating inflationary pressure.
Neither argument is backed by the data. True, preliminary figures show that growth may have hit 0.4 per cent in the second quarter, after nearly stalling in the first, thanks to a rebound in retail sales. But the unusually warm British weather and the World Cup football tournament both seem to have contributed to the spending binge, which would make it temporary. Meanwhile, confidence indicators for consumers and businesses are weakening. That bodes badly for growth.
Furthermore, there are few signs that the economy has reached its speed limit. Inflation hit 2.4 percent in June. While this is higher than the Bank’s 2 percent target, it was lower than expected. Core inflation, which strips away volatile items such as energy prices, fell to 1.9 percent, its lowest point since March 2017. Whichever way you look at it, this is hardly an overheating economy.
Nor are there indications that inflationary pressure is increasing. True, higher energy costs and producer prices could cause a temporary build-up. But there’s no sign of the sustained rise in wages that some MPC members — includingAndy Haldane andGertjan Vlieghe — have predicted. The yearly growth rate of regular pay (excluding bonuses) fell to 2.7 percent from 2.8 percent in the three months to May. And the employment rate is breaking new records, which should keep pay rises in check as more people compete for jobs.
Most important, Brexit uncertainty has increased in the past few months. The visible schism in the ruling Conservative party means there’s a greater possibility of Britain crashing out of the EU without a transition deal. So far, the Bank has assumed that the U.K. would walk out of the EU with a deal, which would avoid severe short-term shocks to the economy.
While this still remains the most likely outcome, there’s a danger of Carney being over-confident. For all the reputational cost of one more flip-flop – and the inevitable “unreliable boyfriend” barbs — this week’s rate hike can wait.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
©2018 Bloomberg L.P.