The FT has reported that:
Mark Carney says it would be “foolish” to cut interest rates or expand quantitative easing in response to falling oil prices, unless lower inflation hurts wage growth, consumer spending and business investment.
They added:
Speaking to the House of Lords economic affairs committee yesterday, the Bank of England governor said UK inflation would fall to about zero in coming months and stay there for much of this year. However, he ruled out more monetary stimulus, adding that a “gently rising path” of interest rates was likely to bring inflation back to the central bank's 2 per cent target.
I think there are two possible conclusions. They are that either Mr Carney has learned to speak in double negatives or he has lost the plot.
The double negatives are in the first paragraph. It would indeed be foolish to react to low inflation if it had no consequences. To that extent Mr Carney is, of course, right. But to think he believes there will be no such consequences pushes credibility to its limits. Of course low inflation has impact on wage growth, consumer spending and business investment. In each case we would expect low inflation that persists for anything but a few months to have negative impact on all three. So, at best Carney was hedging his bets with his comment that embraced what was, in effect, a double negative.
Alternatively, as the second paragraph implies, he is adopting the route to economic suicide for the UK. Steadily rising interest rates, matched with no stimulus, limited or no real wages growth for most people and currently stagnant business investment that is likely to fall still further with deflation and rising rates on the cards, plus a new government that, of whatever its hue, appears to be committed to cutting government spending is, in combination, a recipe for years more in the economic and so social doldrums for the UK. The cost in terms of human suffering alone will be enormous.
Either Carney is playing a dangerous game of double bluff when he has said he is committed to openness or he is playing a dangerous game with ou economy and futures. Either way, I don't like it.
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I have to say that I find the man an enigma. You could almost call him ‘The Man Who Wasn’t There’. He comes across as sort knowing that he has been put into some sort of difficult (but highly paid) situation by those who employed him and that his hands are tied. It’s as if he is there to give credibility to Osbourne and his mates.
I would like to give him more credit than that…………..but I’m just hard-pressed to be able to.
Any attempt to raise interest rates would probably have to be reversed; I think that’s happened in a few countries that tried it (Sweden?). The hokey cokey would do some unnecessary damage to the economy.
However, it’s minor damage compared to the failure to have a more expansionary fiscal policy, or green QE, or both – all of which is beyond Carney’s powers. (Green QE would presumably involve the BoE, but it can’t decide to do it without Government support.)
Difficult to know whether Carney is happy with current policies, or just thinks that the Bank is doing the best it can given the Government’s policies.
(It appeared to be at his insistence that Funding for Lending for mortgages was ended, for which I’d give him some credit.)
“Of course low inflation has impact on wage growth, consumer spending and business investment . . . we would expect low inflation . . . to have negative impact on all three.”
Whaaat? UK consumers pay less to the oil multinationals for petrol and diesel, and that makes those consumers WORSE OFF? Clearly I’ve lost the plot as indeed have the BBC and every news outlet: whenever the price of petrol falls they portray that as good for consumers.
That is a short term impact
Long term deflation increases real interest rates on mortgages, makes debt repayment harder, and reduces dramatically the amount available to spend
For heavens sake look beyond the end of your nose
I don’t want deflation but Mark Carney is talking about short-term disinflation, *not* the same thing. The evidence so far is that the fall in the oil price has increased the amount available to spend and resulted in growth in spending on other things generating faster economic growth. There has been a fall in government receipts from North Sea oil which worsens the budget deficit but some of the impact is a reduction in the transfer of wealth from UK consumers to oil sheikhs.
Poorer people have a higher marginal consumption:income ratio so this will boost spending in the UK economy by more than a cut in interest rates.
I admire your optimism
I have learned that if the BoE thinks it the opposite will happen
Maybe I should not have assumed that “it” was a typo.
If “it” was not a typo, then (i) you are younger than I so your experience is more weighted towards Mervyn King and (ii) the purpose of appointing Mark Carney was to improve the performance of the BoE.
I am not saying that I could not improve the BoE, just that it had an impressively good record prior to 1997 and Carney is hoped to be an improvement on Mervyn King
I think you mist be very young or have rose tinted specs to think the BoE so good pre 1997
I reluctantly vote that your second suggestion is right. Mr Carney is an incompetent bafoon and has been put his in position for that very reason. He certainly does hold the title of governor of the bank of England, but I suspect he does not run it and is in fact just a front man.
The consequences of this as yet unseen will be dire, like nothing we have ever seen before.