Mark Carney knows well enough how keenly market participants watch policy developments these days. He knows how powerfully the tone and language of his every statement can influence short-term sentiment. He made reference to this himself at his August Inflation Report press conference, when talking about the market’s obsession with trying to predict the timing of interest rate hikes. So during the November Inflation Report press conference last week, when one of the very first things he talked about was deterioration in the non-US global economic outlook and a ‘spectre of economic stagnation’ haunting Europe, he knew he was signalling to markets that the Bank of England is stepping back from the prospect of an imminent rate hike.
Markets got the message: the tone of the report has been widely interpreted as dovish and bets on the first rate hike pushed back to next October. This is a significant shift in the expected timetable in just a matter of months. Back in June, Carney was warning rates may well rise sooner than expected, which some interpreted as being as early as the end of this year.
While the lack of inflationary pressures make the idea of rates being lower for longer highly plausible, we should remember that policy-makers themselves keep insisting any change in rates will be economic data dependent. They are not talking about fluctuations in week-by-week data releases. They are talking about longer-term trends that point to genuine economic recovery. So the language of Carney’s statement, which was quite clearly and intentionally indicating a belief that the global outlook has softened, and not just that some areas of activity have shown short-term weakness recently, is quite puzzling. If we actually look at longer-term trends in the UK data, it is difficult to justify any deterioration in the outlook. The chart below doesn’t really indicate anything other than a broad growth trend has happened in the UK economy over the past couple of years.
So in our view, Carney’s statement betrays a bias that all kinds of economic agents struggle with. It seems even policy-makers find it difficult to detach their long-term views from the lure of over-stating the importance of short-term data. He may also be projecting some negative sentiment after a few weeks of financial market jitters and, like a lot of other people, be grasping for explanations. In doing so, he has introduced an unnecessary level of complexity – and potential for greater volatility – to the way in which markets will analyse the relationship between policy and data in the future.
Amid a general air of pessimism, the temptation is to look for reasons to be downbeat. It is easy to become selective about the evidence. If you want to claim you know why equity markets fell for a period in September and October, you could point to some recent weakness in UK retail sales. But if equity markets had continued an uninterrupted rally, we would see people pointing to different data items such as stronger numbers on wages, unemployment, industrial production or the CBI (Confederation of British Industry) industrial trends survey.
Trying to overly fine-tune your view of the world in too sensitive and reactionary a fashion, based on the ebb and flow of data, renders your observations less useful. You can always find something in the data to confirm your pre-set biases one way or the other. In our view, the sentiment most evident across the real UK economy today is a reluctance to acknowledge that well-seated recovery is underway, as well as a lack of will by business to take risk. The Bank of England too still thinks the greatest risk is one of aborted recovery. They may well be right, but the current facts show more meaningful signs of UK economic strength than weakness.
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