On Wednesday the new governor of the Bank of England was feted with instigating a revolution in policy-making when he gave forward guidance to markets, borrowers and savers.
Mark Carney pledged historically low policy rates at 0.5% were here to stay so long as the jobless rate remained 7% or above. Official data has it at 7.8% presently.
Media latched onto the prospect of ultra-low rates until 2016 or even 2017 on the basis of how long it could take for the jobless rate to fall.
Along with a flurry of better-than-expected UK data this week and BoE upwardly revised GDP forecasts this was greeted as a salvage for David Cameron’s unpopular government.
Apart from bank and pension savers, everyone would have something to celebrate, commentaters mused.
But any signal of low rates for years is also one way of saying things are far from normalising, yet. As I wrote in my previous blog submission households are severely in debt and have become an impediment to economic recovery.
Plus bankers will always tell you to read the small print. Why would a central banker be any different? Other Carney conditions include inflation based on CPI remaining no more than 50 basis points above target. That target is 2%. Inflation is…2.3%.
But Carney has thrown up a more significant issue ripe for debate in this August lull. Why has monetary policy been so short-termist for decades?
In the United States mortgages are linked to 30 year T-Bonds. Hence why the Federal Reserve targetted suppressing long-dated yields to rescue its economy.
But in the UK we peg to short-dated, and recently disgraced, Libor and other wholesale money market rates. Hence why in the United States you can get a 30-year fixed mortgage, helping you plan for your life, while in Britain you get three-year fixed-rate mortgages. In Britain, it creates a far more opportunistic mindset with live-for-now consumers and explains Britain’s poor Research & Development and general investment rates.
Carney has the right idea. But this isn’t Canada.