Lawmakers Push Carney on BOE’s Economic ForecastsBy
Governor says officials didn’t agree any guidance on rates
Policy makers had previously been ‘neutral’ on next move
Mark Carney may be neutral no more.
The Bank of England governor declined to confirm whether officials were still committed to their previous agreement that they were “neutral” on the next move in interest rates, as lawmakers pushed him at a hearing in London to clarify the current policy stance.
In testy exchanges, politicians needled Carney on the status of his forward guidance and how he tweaked an estimate of unemployment to provide more leeway to keep policy loose. Andrew Tyrie, who leads the Treasury Committee, directed more questions than usual at the other BOE attendees in an effort to expose differences of opinions among them.
Carney’s dropping of the guidance -- even when pressed -- may signal the start of a shift in the central view of the Monetary Policy Committee after some officials started to raise concern this month about accelerating inflation. The unwillingness to be pinned down could also show Carney doesn’t want a repeat of 2014, where he was criticized for whipsawing markets with his efforts to provide greater clarity through his forward guidance policy.
“There are scenarios where rates could rise at a faster rate than the market curve, and there are ones where they’d rise more slowly,” Carney said at the hearing of the Parliament committee on Tuesday. “We didn’t come to an explicit view as a committee on explicit guidance that we wanted to give, so I’m not going to invent one now.”
The answers didn’t appear to satisfy Tyrie, who said the group will be asking the governor about the issue at the next hearing.
“Since you introduced forward guidance I think it’s a relevant question to ask whether there is any,” Tyrie told Carney. “At the moment we are not clear whether there is some.”
Carney was also pushed to defend the BOE’s recent revision to the amount of spare capacity in the economy, saying policy makers were right to say unemployment could fall further before generating inflationary pressures. That modification was published alongside new projections that saw the BOE upgraded its economic outlook for the second time since the Brexit vote.
Tyrie grilled the governor and his colleagues on the change, suggesting that it allowed the central bank to push back expectations for when interest rates will rise.
BOE officials lowered their estimate of what the equilibrium unemployment rate to 4.5 percent from 5 percent. Under Tyrie’s questioning, policy maker Ian McCafferty said he disagreed with the size of the change -- he believes it’s more like 4.75 percent -- while Gertjan Vlieghe told lawmakers he backed it. Kristin Forbes, who wasn’t at the hearing, voiced her dissent in a speech this month. Unemployment was 4.8 percent at the end off 2016.
“This matters a lot because the BOE can allow forecast growth to rise without inflationary consequences once you’ve lowered this number,” Tyrie told Carney. “Indeed that seems to be a crucial ingredient for your making of assumptions on when to raise interest rates.”
The governor replied that was “a total mis-characterization.”
The MPC’s revision to equilibrium unemployment prompted investors to reduce bets on the key rate rising from 0.25 percent this year. They now see a 18 percent chance of a hike by the December meeting, compared with 48 percent at the beginning of February.
Carney, who came under fire last year for being too gloomy about the impact of Britain’s vote to leave the European Union, also expressed frustration about criticism of the BOE’s policy response to the referendum.
“You won’t like for saying this, but success is an orphan on this,” he said. “In terms of the financial-stability risks around the referendum, the bank did take some serious steps. If we hadn’t done that, there would have been macroeconomic consequences. It’s important we did. We just have to accept we will never get any credit for it.”