Just over a year into his five-year term as Bank of England governor, Canadian Mark Carney has gone from rock-star banker to "unreliable boyfriend", accused of sending out mixed messages over the timing of an interest rate rise.
Even worse, some claim Carney has struck a secret pact with chancellor George Osborne to keep interest rates at their record low of 0.5 until after the general election next May, a claim firmly denied both by the treasury and the central bank.
It was MP Pat McFadden who first coined the “unreliable boyfriend” tag for Carney, when the governor appeared at Westminster a couple of months ago to answer questions on the inflation report.
Carney was accused of blowing hot and cold on rates, a reference to his earlier speech at the Mansion House, in which he shocked markets by warning that rates could rise sooner than expected. Those comments followed several months of expectations being guided away from an early rate rise.
The governor had already been forced to effectively abandon his much-publicised policy of forward guidance, launched a year ago to general acclaim. There were a few doubters, however, and they were proved right.
A rise in rates was tied to a fall in the unemployment rate to below 7 per cent, but unemployment fell far more rapidly than expected and is currently standing at 6.4 per cent. So the unemployment rate link to rates was abandoned, replaced by a range of indicators, from the amount of spare capacity in the economy to GDP growth and productivity.
Now the inconsistent suitor has been at it again. Last week’s latest inflation report highlighted much weaker than expected wage growth, as the central bank slashed its forecast for growth in pay this year from 2.5 per cent to just 1.25 per cent.
Barely had the markets taken that on board than Carney flip-flopped again, telling the weekend press just a few days later that the bank does not necessarily have to wait for wages to rise before it raises rates.
Carney insists his comments are consistent – consistently based on data, which, admittedly, do keep changing. But one can’t help feeling that the Bank of England is as mystified about the true state of the UK economy as the rest of us.
Prospects of an early rate rise looked to recede again yesterday when inflation figures for July showed a sharper-than-expected fall in consumer price inflation (CPI), the government’s preferred measure of the cost of living.
Having spiked up to 1.9 per cent in June, CPI fell back to 1.6 per cent in July, thanks to High Street retailers holding their summer sales a few weeks later this summer, which cut the cost of clothing and footwear in July.
It is the seventh month in a row that inflation has been below the government’s 2 per cent target.
Meanwhile, further clues on the timing of a rate rise will come this morning when the Bank of England publishes the minutes of the August meeting of the monetary policy committee.
The committee has voted unanimously to keep rates on hold for the past three years but some analysts think there may now be a split among the nine-member committee, with at least one member voting for a rate rise.
The minutes should serve to disprove recent claims from a couple of MPs that Carney has agreed a deal with the government to keep rates unchanged until after next May. There are nine members of the committee and they all have a vote, making it impossible for the governor to hold sway – unlike in his previous post as governor of the Canadian central bank, where the rates decision was effectively his alone.
So, when will rates rise? Whatever the minutes reveal, the answer at this stage appears to be anyone’s guess.
Inflation data
Commuters always anxiously await the July inflation data, as the figure dictates how much rail fares will rise next January. The formula for the increases is based on the retail prices index (RPI) plus 1 per cent. As RPI rose by 2.5 per cent in July, the average rail fare will rise by 3.5 per cent, although the rail companies are allowed to increase prices on some routes by a further 2 per cent.
Last year, the chancellor cancelled the plus 1 per cent part of the equation, restricting the rise to the rate of RPI.
As the nation goes to the polls just a few months after the higher fares take effect, it’s a pretty good bet that Osborne will do the same again next year. Fiona Walsh is business editor of theguardian.com
