Carney Confusion

In August of last year we wrote a piece called, Mark (et) Carn (age)”, which provided a little history on the new wonder-boy of central banking, Mark Carney, going on to quote the new Governor of the Bank of England as follows, “Britain’s interest rates are likely to remain at a record low for at least three more years,” going onto say that the base rate will not rise until the UK unemployment rate falls to 7%.

He called this, “forward guidance,” the idea being that it would provide businesses and consumers with confidence to take on more debt.

Well, Mr. C and the 1000-odd economists’ beavering away at the Bank of England got it wrong, as they consistently do with most economic forecasts such as inflation and GDP, as within six-months, not three years as forecast, UK unemployment is knocking at the 7% level, hence it was no guidance at all.

This week Carney changed the “guidance” to focus instead on the output gap, stating that there is still to much spare capacity within the economy, with the bank now looking at 18 indicators including labour productivity, average hours and wage growth instead of targeting unemployment.

Aside of widening the odds from one indicator to 18, clouding the issues further, he suggests that the spare capacity gap will close in three years, inflation will exceed 2.27% in 2016 and GDP will jump to 3.4% this year!

So what are his chances of being correct this time?


As always let’s allow the charts to do the talking and this one compares UKGDP, CPI, Money Supply and the dashed- line Output Gap.

We note the following in order of importance:-

  • Money supply (and an increase /decrease in debt) dictates the rate of economic growth / GDP, particularly in an economy 70% or so dependent on consumption.
  • Note also that it affects the rate of inflation, or CPI, plus the output gap and by default excess credit growth creates a mis-allocation of capital and excess capacity which takes years to work off

The Bank of England, along with the other major central banks, have tried to re-flate their economies by way of QE, LTRO and a whole bunch of other “stimulus” measures, to the tune of $US 20,000,000,000,000 so one shouldn’t be too surprised to see a temporary pick-up, as can be seen on the right-hand side of the chart.

However, this action has compounded the problems that became evident in 2007 and, as can be seen, CPI and money supply are turning down once more, as will GDP and the output gap.

So in answer to the question posed, we rate the Governor’s chances of guidance being correct as slim at best.

In fact, he risks not only offering further confusion to businesses and consumers but also the realisation that Central Bankers actually have very little control over the economy, just as the myth that central bankers’ control interest rates is fast being exposed by the 10-year gilt, treasury and euro-zone yield.

In summary, try not to be as confused as Mr. Carney, it could prove to be very expensive.



2 responses to this post.

  1. Charlie, this is plausiby argued as usual, BUT…. whilst the charts may do the talking, they obviously don’t tell the truth, otherwise we would have been more successful! (or is it just that they can be interpreted as we wish, in which case they don’t do the talking). I don’t think you should be contrarian for the sake of it either – Carney may not be constant (forward guidance turned out to be a meaningless soundbite) but maybe we should appreciate his reactivity/flexibility! In any event, in our position I wouldn’t dare say that listening to him could be an expensive mistake….


  2. […] lesser mortals of course and make an absolute joke that markets are free, transparent and fair. “Carney Confusion,” along with sections within the aforementioned commentaries, exposed the “myth”   that […]


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