The job that Mark Carney was hired to do OK, so what did the new Bank of England boss actually do yesterday?
Before Mark Carney came along, the only thing the BoE was meant to care about was inflation. If the Consumer Prices Index (CPI) was rising at more than 3% a year, or at less than 1% a year, the governor had to write a letter explaining why. CPI was meant to stay as close to 2% as was realistically possible.
Now, if the BoE had actually given a damn about this target at any point over the last five years, Carney's actions yesterday would have been genuinely radical. But as we all know, CPI inflation has been pretty much ignored by the BoE for ages now. It's been above the 2% target since late 2009.
As we also know, the BoE's forecasts of future inflation are virtually always wrong. That's because the forecasts aren't really aimed at predicting where inflation will be. Instead, their main function is to justify keeping interest rates low.
So they always understate future inflation, because the only way to pay lip service to the target is to say: "Inflation may be higher than target now, but it won't be in a couple of years – and that's what matters."
So the BoE has been ignoring the inflation target for a long time. All that Carney has done, is to formalise this a little more.
Now, says Carney, interest rates will stay low until unemployment falls to at least 7%. He doesn't expect this to happen until 2016. But even then, rates won't necessarily rise. He'll just take another look at the situation.
There are two "knockouts" that might make the BoE raise rates before then, he says. One is if the BoE expects inflation to be at 2.5% or more in 18 to 24 months' time.
The second is if "medium-term inflation expectations" are no longer "sufficiently well anchored". In other words, if people start to expect soaring prices, the BoE might have to act.
That's the British central banking revolution summed up. It doesn't amount to much.
And what's more, it's all rubbish.
Here's what the BoE really wants. Britain's problem is debt. Government debt, mortgage debt, consumer credit – you name it, we're up to our eyeballs in it.
The easiest – or rather, most politically palatable - way to get rid of that debt is to inflate it away. You do that by making sure that the rate of inflation is higher than interest rates. In effect, you steal money from savers to ensure that lenders who made bad decisions don't go bust.
That's it. That's Mark Carney's job. That's what he was hired to do.
All this tripe about employment targets, and 'knock-out' clauses, and all these tedious experts combing every word and comma the man said – don't waste your time with it. It's all excuses.
Britain's inflation target has just shot up Carney said precisely two things yesterday that are actually significant. The first was that he made clear that the BoE's inflation target has now changed. It used to be 2%. Now it's 2.5%. So our central bank has officially raised its inflation target by 25%, with barely anyone commenting on it, let alone voting for or against it.
Wasn't that skilfully done?
Secondly, Carney is a cheerful backer of the government's attempts to reflate the bubble before the election rolls around. "We have to put recent developments in the housing market in context, we still see mortgage applications are well below historic averages."
So, even although a property bubble is what brought us all to this sorry pass in the first place, our shiny new central bank is paying it no more attention than the last lot did. At least Mervyn King issued the occasionally mealy-mouthed warning on house prices, even if he did absolutely nothing about it.
What does this all mean for investors? The market reaction was interesting. Gilts barely budged. Sterling at first dived, then surged.
Bond investors tend to take a long view. They can see that inflation is going to be a problem. But they can also see that Carney has no intention of letting interest rates rise. If pushed, that might even mean doing more quantitative easing to keep gilt yields down. So they're not ready to panic out of the market yet.
Currency traders take a much shorter view. They looked at all the conditions that Carney had attached to the interest rate decision. They clearly believe that there's more chance of a stronger UK recovery than Carney expects. That'd force him to raise rates.
What the currency traders have missed (and it's understandable, because this is such a short-term market) is that even if the data is better than expected, Carney will find a new set of excuses to keep rates low. So don't expect any rampant recovery in sterling to last for long.
All this means for you is that you'll have to work harder than ever to earn a 'real' return on your money. You won't be able to do it in a bank account. So if you want to save for the long term, you'll have to invest. But investing against such an uncertain backdrop – where many assets are already overpriced on a historical basis - means that you really have to be on top of your risk management too.
My colleague Phil Oakley writes a newsletter dedicated to building a simple, low-cost diversified portfolio that should withstand most market conditions over the long term. You can
find out more about it here.
Got a comment on this article? Leave a comment on the MoneyWeek website, here. Until tomorrow,
John Stepek
Editor, MoneyWeek
Our recommended articles for today...
Britain's looming disaster - Debt-soaked Britain is heading for a catastrophe thanks to its profligate spending. But as Bengt Saelensminde explains, alert investors can still profit:
Britain's looming disaster Can you trust the economic recovery? - The belief that an economic recovery is underway has lifted markets to dizzying heights. But don't be fooled, says Tim Price. It's all an illusion:
This short-term thinking will lead to huge long-term damage.
And for
yesterday's market update, see below...
Just plug this unassuming USB drive into your home computer, and it could earn you £2,653 a month on average – entirely tax-free... 
No comments:
Post a Comment