Belfast Telegraph

Thursday 2 October 2014

Politicians and their conspiracy theories over interest rates are wide of the mark

Bank of England's Governor Mark Carney

Like Caesar's wife, the Old Lady of Threadneedle Street is supposed to be above suspicion. But some members of Parliament have suspicious minds.

The Conservative Mark Field and the Labour MP John Mann have alleged that the Bank of England's Governor, Mark Carney, has entered into a bargain with George Osborne to keep interest rates low until after the General Election.

It's of course possible, even likely, that the Chancellor would prefer the Bank to keep rates on hold until after next May.

The Bank released some forecasts earlier this month showing what, in its view, would happen to growth if its main policy rate remained rooted to record lows of 0.5% over the next nine months or so.

Under this scenario, growth accelerates from the present rate of 3.2% and hits an annual rate of around 4% in the first quarter of next year. But if interest rates are lifted before next May, in line with market expectations, annual GDP growth would moderate to just 3.3%.

Could the difference (and the accompanying boost to consumer confidence) push the Conservatives over the finishing line in first place next May? Would the first rate rise since July 2007 pique the electorate, nudging swing voters to punish the Coalition parties in the voting booths? Who knows, but it's the kind of calculation many chancellors, facing an election, have made in the past.

That's certainly a more plausible thought process than the Treasury spin line that an early rate rise would be "a sign of success" for the economy. One suspects there are unlikely to be many people saying "oh good, my monthly mortgage repayments have gone up – that's a welcome sign of success".

Yet the fact that there's a motive for the Chancellor to lean on his Governor over the timing of rates does not prove the case of the accusers. And there are some strong reasons for being doubtful. The practical difficulties stand out. The Governor does not set rates alone, but as part of a nine-person Monetary Policy Committee made up of a mixture of Bank executives and external appointees. The Chancellor would need to suborn not just Mr Carney, but eight of his colleagues if he wanted to ensure rates did not rise.

There have been some mutterings in the City over the "monotone" quotes emanating from MPC members over the past year in media interviews. And no one seriously doubts that Mr Carney is primus inter pares on the committee. Yet it's still a stretch to imagine that the Governor can bend his MPC colleagues at his will.

One should look at actions rather than words.

The limits of Mr Carney's personal power were underlined in the original form of his Forward Guidance on rates adopted last summer. This set an unemployment threshold of just 7% – higher than the 6.5% target being used by the US Federal Reserve and, one can reasonably assume, higher than the dovish new Governor would have liked. It's pretty obvious that there was MPC pushback to a strong form of forward guidance.

And one external member, Martin Weale, even dissented from the relatively weak form of guidance that was adopted.

More evidence may come this week if minutes of the August MPC meeting show that some members have started voting for rate hikes.

At the Canadian central bank, Mr Carney's previous berth, the Governor does, effectively, set rates alone. A political bargain in that context might have been conceivable. But things are different here.

Individuals, even central bankers, are inherently weak. But that's precisely why we have institutional checks and balances. And the institutional arrangements of the Monetary Policy Committee, put in place by Gordon Brown back in 1997, offer a pretty robust barrier to political interference in interest rate decisions.

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