Hey there, time traveller!
This article was published 4/7/2013 (1362 days ago), so information in it may no longer be current.
The Bank of England became a great deal more talkative this week as Canadian expatriate Mark Carney took over as its governor. After his first interest-rate-setting meeting, Mr. Carney issued a longer economic commentary than Britain is accustomed to. He told the world he's going to keep British interest rates at their present low levels.
The U.K. central bank noted that inflation had spiked to 2.7 per cent lately and seemed likely to go higher -- but not for long. Market interest rates had also spiked, as though investors were expecting the central bank to push the official rates up. The bank's monetary policy committee, however, thought the latest data suggested inflation would settle back towards two per cent after the current spike because of international price declines and domestic productivity improvements. In the committee's view, "the implied rise in the expected future path of Bank Rate was not warranted." Consequently, the bank kept its administered rate at half of one per cent and continued its aggressive program of asset purchases -- rapidly expanding the money supply.
Canadians are used to commentary from their central bank, but the British are not. The Financial Times index of London stock prices shot up three per cent since borrowers will have money in their pockets. The pound dropped, since sterling loans will pay less interest.
The European Central Bank concurrently held its interest rates steady and offered commentary to explain its thinking. ECB President Mario Draghi told a press conference that interest rates would remain low for an extended period. The Carney method of explaining to markets what the central bank sees and what it expects to do is therefore quickly becoming the usual way of conducting monetary policy in the U.K. and in Europe. It is a slightly risky method because of the uncertainty of each day's economic events. If U.K. inflation keeps spiking upward the rest of this year and into next, Mr. Carney may have to eat his words. His method is helpful to markets, however, because it gives investors a basis beyond mere guesswork for anticipating what the central bank will do next.
Central banks are not infallible, as they have proved many times, but they are better informed than most market participants. U.K. markets are likely to appreciate the Carney method once they get used to it: they now have a central bank governor who tells them what he sees on the horizon.