When you miss the goal, shift the posts. That is the Bank of England’s standard procedure as it tries to convince businesses and households that it can read the path of economic recovery and indicate when the next interest rate change is coming.
But this tactic, aired again on BBC radio on Friday by the Bank’s deputy governor, Nemat Shafik, is delivering diminishing returns and can hardly be considered part of a winning strategy.
It has been obvious for some time that interest rates were not going up early next year. So when the rate-setting monetary policy committee (MPC) offered a quarterly inflation report (pdf) this week which conceded that inflation is much lower than had been expected a year ago, and is forecast to rise more slowly than previously anticipated, many commentators were not surprised.
The concern instead was that Threadneedle Street could so woefully fail to spot the underlying signs of weakness in the global economy, from declining global trade to tumbling energy and commodity prices, that have consistently stripped inflationary pressures out of the UK economic system.
Put on the spot over the repeatedly errant forecasts, Shafik adopted a new version of the Bank’s recent dissembling. She said there was no target date for an interest rate rise and besides, the date was irrelevant. All businesses and mortgage borrowers need to know is that when rates rise – at some point – the upward path will be at a slow pace and not as high as previously.
Yet it is only four months since the Bank’s governor, Mark Carney, was as good as telling us rates would be going up imminently.
It is part of the MPC’s remit to manage City expectations so when an increase comes, there are no destabilising shocks to the financial system, such as a dangerous rise in sterling.
There is a huge amount of speculation in financial markets and much of the betting will be tied to a boost or fall in sterling. That means the date for the next interest rate rise, however small, is important. Shafik cannot just wish that away. For a long time, the City has laughed at the Bank’s forecasts and predicted a long delay in the first move.
Of course, the Bank should not be the only body addressing the concerns of financial markets and mortgage borrowers. The Treasury should stand alongside Carney with measures to calm asset bubbles that he said he feared could accompany a longer period of low rates, especially in housing. But George Osborne’s abdication of responsibility for spurring the next housing boom and bust is a separate debate.
