Mark Carney Explains Why he is no Sheep of US Federal Reserve Policy
Carney's uncoupling of U.K policy from U.S policy has led to pushing back of rate hike expectations into 2017, when previously they had settled on November.
Like a troublesome truck from the classic children’s stories of Reverend W Awdrey's Thomas and Friends, Mark Carney has uncoupled himself from the Federal Reserve’s chugging loco of hawkish rate hikes higher.
In a speech delivered at Queen Mary University of London, on Tuesday the 19th of January, he emphasised that interest rate rises were not imminent.
Carney specifically dealt with the question as to why the UK was not following the US in raising rates.
A number of analysts had suggested that historical precedent would see the Bank of England raise interest rates only once the US Federal Reserve had. Hence, a US rate rise was seen as a greenlight for a UK rate rise.
Sterling rose in sympathy with this train of thought.
However Carney and his team at the Bank of England have now confirmed buying the British pound on this basis was incorrect - they have shown they are not slaves to US policy.
According to Carney the mirroring of US interest rate decision-making did not happen simply, and rightly, because the US and UK face different economic conditions.
He listed these for the following reasons:
1) Cost pressures are stronger in the US. American unit costs have increased by 3% in the past year and are growing above historical averages, while unit costs in the UK are currently rising by around half that rate or at a speed notably below that consistent with the inflation target.4
2) The UK economy is twice as open as the US and is therefore more exposed to global weakness, dragging on exports.
3) This also means that pass-through of weak global inflation, compounded by exchange rate appreciation, is likely to exert a greater and more persistent drag on UK inflation. Partly as a result, after adjusting for one-off factors, core inflation is firmer in the US than the UK.
4) The stance of fiscal policy differs markedly. The UK is undergoing the largest fiscal consolidation in the OECD, with the structural deficit projected to decline by around 1 percentage point a year on average over the next four years, having fallen only 1/3 percentage point on average over the past three. In contrast, US fiscal policy is expected to loosen notably over next three years.
5) The Bank of England’s control over macroprudential policy (i.e capping buy-to-rent mortgages, ensuring only those who can afford mortgages get a mortgage) reduces the need to use monetary policy to address financial stability considerations
So what does this mean for higher UK interest rates?
“In my view, the decision proved straightforward: now is not yet the time to raise interest rates,” says Carney.
“This wasn’t a surprise to market participants or the wider public. They observed the renewed collapse in oil prices, the volatility in China, and the moderation in growth and wages here at home since the summer and rightly concluded that not enough cumulative progress had been made to warrant tightening monetary policy.”
The pound is lower once more as are interest rate expectations.
2017 it is then.
