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Wednesday, 13 November 2013

Do we know where he's going to?

A minor tweak to Diana Ross's 1975 hit might suffice as the soundtrack to Mark Carney’s second Bank of England Inflation Report. Prior to today’s announcement the weekend press was abuzz with speculation that the Monetary Policy Committee would bring forward the projected date that unemployment would fall to the seemingly all-important 7% threshold that is the main condition for rates to finally start lifting from the historic lows.

And so it was: the probability given for joblessness to hit 7% was intricately calculated to be “around two in five” by the end of 2014 and “around three in five” by the close of 2015. In the August, the odds were adjudged to be some 25% and 45% respectively, according to a ruler I ran across the chart published in that report.

I employed the same ruler, due to lack of access to the Bank’s Kray mainframe, to project that it will hit 7% as soon as Q2 next. Why? According to ONS figures released earlier in the morning, it fell from 7.8% in Q2 to 7.6% in Q3, so joining the dots … (Actually, the unofficial monthly rate for September was 7.1%, so maybe I should have bent the ruler into a downwards curve.)

Furthermore, growth forecasts for 2013 were lifted to 1.6% from 1.4% in August and for 2013 they were raised from 2.5% to 2.8%.

The language employed in the report also points to impending tightening of monetary policy. August’s version opined that “a recovery appears to be taking hold”, while Carney colourfully commented that the economy “is not at escape velocity”.

Fast forward, literally, in economic terms and today’s announcement kicks off with “recovery has finally taken hold. The economy is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand”.

But after that the prevarication sets in: “Significant headwinds – both at home and abroad – remain”. These include the always very real danger that the Eurozone will collectively shoot itself in the foot.

There is also the question of inflation. That fell unexpectedly to 2.2% in October and the Bank concluded this would trend below expectations in the short-term.

In the post-report press conference Carney stressed that 7% unemployment was a “staging post for assessing policy, not a trigger”.

That was implicit in the original tenets of Forward Guidance, which Carney imported following his move from the Bank of Canada. Rates won’t rise at least until 7% had been breached and 2016 was deemed to be the likeliest date. But the unemployment factor was stated more blatantly in August and policy explained quite a lot woollier in the press conference.

Could it be that ministers have been bending Carney’s ear rather more forcefully in recent weeks as parts of the economy – particularly housing-related – have gathered momentum faster than anticipated (in no small part thanks to their own Help to Buy policy)? Raising rates soon before the 2015 General Election would be a huge political hot potato Carney may not be too keen to take out of the oven.

Irrespective of this, the markets soon concluded he – or rather the MPC – will have to. Sterling, which had fallen almost two cents to $1.5864 mid-Tuesday on the inflation data, strengthened to $1.6033 as the jobs data and inflation were scrutinised and an early hike was concluded. Housebuilders shares fell by 3 – 5% despite Barratt producing a sparkling IMS that could have been cut and pasted into any of the other sparkling trading statements from rival housebuilddrs that preceded it over the past few days. (US homebuilders shares have performed likewise on rates rise jitters.)

Confused? Possibly. So we might not know much more where he’s going to. The question is … does he?

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