Bank of England Governor defends straying from interest rate guidance
Mark Carney said a May hike was never set in stone.
Bank of England Governor Mark Carney has defended the decision to hold interest rates steady this month despite having signalled a hike in May.
Treasury Select Committee chairwoman Nicky Morgan asked the Bank chief whether he accepted that statements referring to a “somewhat earlier-than-expected” interest rate rise was “rather confusing”, given that rates were ultimately kept steady at 0.5%.
Mr Carney said a hike was never set in stone.
He said: “We give guidance. The guidance is conditional on the economic outlook.
“If the outlook changes, the actual policy stance will adjust, and of course the policy stance is determined by the sum of the individual decisions,” he told MPs during a Treasury Select Committee hearing on Tuesday.
“What happened was the economy did not in the first quarter evolve broadly in line with our forecast,” he added.
“Inflation came in lower, economic momentum – a number signs – were lower, and then ultimately the hard data came in lower as well and we as a committee sat back, looked back at that data and took our own assessments.”
While two members of the Monetary Policy Committee (MPC) voted in favour of an interest rate rise, Mr Carney said the majority “thought it made sense to take a bit of time to see that the momentum that I expect – that we expect, as a committee, in our forecasts – the momentum in the economy to re-establish itself before raising interest rates”.
The Governor has been dubbed the “unreliable boyfriend” by critics, who say he has failed to follow through on monetary policy guidance on multiple occasions.
However, Mr Carney said that guidance was “first and foremost” meant to serve households and businesses who he believes “have been getting the message” and expect a series of gentle rate rises over the course of the year.
There has been “rigorous” debate among the MPC about providing more accurate forecasts for interest rates – like the US Federal Reserve’s use of dot-plots – but there has been disagreement over its adoption.
While external MPC member Gertjan Vlieghe is in favour, others including Sir Dave Ramsden have been “more sceptical”.
Michael Saunders said quarter by quarter forecasts gave “false precision” and risked giving “greater certainty than is possible.”
Mr Carney said: “The majority of the committee was not in favour of publishing a path but it was the right question to ask. There are arguments for and arguments against.
“I think the risk of it being interpreted as a promise, as a commitment, are real.”
The decision to hold interest rates this month came after the UK suffered a shock slowdown in growth to 0.1% in the first quarter.
While the Office for National Statistics (ONS) suggested wintry weather brought in by the Beast from the East had a relatively small impact on growth, the Bank is convinced snow was to blame.
The Bank said it was down to different ways of assessing the snow impact, having tapped its agency network to visit “hundreds and hundreds” of businesses across the country, while the ONS results were based on answers from “very few firms”.
“We probed the individual components of output, compared it to previous instances when there was snow, which sectors are more likely to be affected than other sectors,” Mr Vlieghe added.
Mr Carney said: “Not surprisingly the (answer to the) question on the retail side, on the construction side, distributed services, was yes, we were affected by it.”
The Bank of England is expecting growth to rebound to 0.4% in the second quarter.
Mr Carney added that the Brexit vote has had a noticeable impact on the economy, having lowered growth by “up to 2%” and knocked real incomes per household by about £900 against what the Bank had expected in 2016 if the UK had voted to remain in the EU.
He added that business investment was still being held back, but there was a chance there could be a “sharp pick-up” in investment when the Brexit agreement is finalised.
“It’s understandable why businesses are holding back – there’s some big decisions that are about to be made – why wouldn’t they want to wait until the path becomes clearer?” he said.