Carney helps clear a mess he partly made

A James Alexander post

Mark Carney gave a speech at 4pm today that clearly eased monetary policy and raised NGDP growth expectations. Sterling immediately fell 1%, gilts rose 1% and stocks surged. What had he said that was so good?

Essentially this: The fall in Sterling would push up domestic inflation and not only was he OK with that but he also expected he would have to ease monetary policy even further.

Finally, as expected, sterling has depreciated sharply. For given foreign demand, this will mean support to net trade, though this may well be dampened by uncertainty around future trading relationships. A lower exchange rate will also entail higher prices for imported consumer goods, energy and capital goods, and consequently lower real incomes.

As the MPC said prior to the referendum, the combination of these influences on demand, supply and the exchange rate could lead to a materially lower path for growth and a notably higher path for inflation than set out in the May Inflation Report. In such circumstances, the MPC will face a trade-off between stabilising inflation on the one hand and avoiding undue volatility in output and employment on the other. The implications for monetary policy will depend on the relative magnitudes of these effects.

In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer. 

We have been consistently critical of Carney due to his instigating a crushing slowdown in NGDP growth during 2015. It has dragged down RGDP growth and made the UK vulnerable to shocks, like Brexit. To be fair, he is only one of many central bankers with the same mindset of inflation-phobia that blinds them to weak NGDP growth – and one shared by most mainstream economists and many financial types.

He didn’t help his credibility by taking sides in the referendum debate warning of potential long term damage to the economy. No one can predict with any confidence what the economic outcome will be given the huge unknown of the future political and trade relationships. These are political issues on which he was badly trespassing. 95% of economists reckoned an 8% loss of RGDP by 2030, roughly what the domestic FTSE 250 index fell. It’s an approximation that will depend on the politics.

The politics quickly became a huge mess, but is gradually being resolved. The FTSE 250 is recovering. A big help has been and will be the devaluation, a natural offset to economic damage from political uncertainty. Carney has now not only blessed the devaluation but vowed to protect it. So credit where credit is due.

That said, the bad old Carney was still evident earlier in the speech when he said this:

In May, the MPC judged that a sustainable return of inflation to the 2% target probably required a gradually rising path for Bank Rate over the next three years as growth picked up, jobs and wages increased and the drags from a stronger currency and lower commodity prices faded. 

To get inflation up he needs to tighten monetary policy? What? It still shows he is badly confused about his role even if he seems to be a good man in a crisis. The sad thing is that he is partly responsible for the crisis – a characteristic of far too many of today’s central bankers.