Mark (et) Carn (age)

Britain’s interest rates are likely to remain at a record low for at least three more years,” says the new Governor of the Bank of England, Mark Carney at the bank’s quarterly inflation report, going onto say that the base rate will not rise until the UK unemployment rate falls to 7%.

Before we look at his chances of achieving this bold claim then perhaps it’s worth a little history on the man. He spent 13 years with Goldman Sachs, which of course qualifies him for treasury and/or central bank duties, before stepping into the Bank of Canada deputy governor roll in August 2003, albeit that he was seconded to the finance department a year later until being appointed as the boss of the Canadian central bank in February 2008.


The job catapulted him to, “Most Trusted Canadian,” according to the Readers Digest in May 2011, and “Central Banker of the Year 2012,” according to the Euromoney magazine, due to his actions that helped Canada avoid the worst aspects of the financial crisis that began in 2007.

Err, excuse us, but it looks to be more to do with the commodity cycle that cushioned the Canadian economy, rather than wonder-boy, and now that the commodity cycle appears to have peaked, Canadian GDP, like its OZ counterpart, is falling.

If we move onto the myth that central bankers’ control interest rates, a fact that we have been banging on about for years, acknowledging that whilst the CB does indeed set the base rate, it’s the market that sets longer term interest rates (anything from 1 month to 30-years.)

Furthermore, observe the Canadian bank rate against the 3 month money-market rate, where one can note that the bank rate follows the market rate, not the other way round.


In other words, Carney, like his central bank counterparts elsewhere, have never made a proactive decision on interest rates in their lives, they act retroactively, following the market.

The new, “forward guidance,” proclaimed by Mr Carney, is conditional on UK inflation remaining within 0.5 percentage points of the 2% target on a two-year horizon, not that his predecessor, Mervyn of the gold-plated pension scheme, ever got remotely close to his CPI target over the past five years or more.

The future will tell us IF the new boss is any better on targeting, but we doubt it. What we do know is that long-term interest rates are on the rise, up by a staggering 77% in a little over one year, and yesterday’s charade is unlikely to make any difference to that fact.


In the real world, where UK business owners and house-buyers have to borrow at market rates, usually tied to the 10-year Gilt yield, the cost of servicing their existing debt has started to rise fast, which is not conducive to them taking on further risk, including that of more staff. Hence our wager would be that unemployment is set to rise from the current 7.8% official rate, GDP and CPI will continue to fall, burdened with a historically large debt load and Mr Carney’s reputation will have nowhere to go but down.

UK market volatility jumped on yesterday’s “policy guidance” as confusion set in. That appears to be another attribute of today’s central banker, but the herd is gradually wising up.

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