We predicted in earlier posts that UK real-sector activity would flatten estimates, especially in services and manufacturing; that economists were driving full speed ahead with their eyes in the rear-view mirror. Most of these types are now extracting themselves from the wreckage. And yet just a day or two after Manufacturing, Construction and Service reads all blew through consensus, Carney explained to the market crowd that he will keep the base rate very low (0.5%) until unemployment touches 7%! Inflation last print at 2.8% was apparently not a problem. And then just following Carney’s announcement, both Jobs and Consumer data likewise flattened estimates. Naturally, gilts have tanked.
Key – central bankers rarely understand FI price determination, the workings of the auction market. This was especially true with Greenspan, is true with Bernanke and apparently true with Carney. It is how and why they can get themselves in a lot of trouble.
However – and this is a really big “however” - the skill or instinct to predict FI price change is not a requirement for the chair to be successful. Any chair can stay out of trouble given he has a lick of sense. To be successful the chair must function under some rule of order; that is, policy fixed for all to understand. When the chair invents policy with all sorts of escape clauses and bells and whistles, as Carney has, and then compounds the problem by attempting to communicate through the noise and bullets, then that chair has stepped right into it.
Best would have been to stick with a 2% target but no, that was too easy.
Just ahead: Although she’s come along nicely, the UK economy has a few more pleasant surprises in store. Gilt prices will ease further. Carney will then hint at more QE. Sterling will tank. And even if it doesn’t the Bank’s buying of a few long bonds will not stop the hemorrhaging. That is not the way things will work. Gilt prices will erode still further. This will retard economic momentum or even stop it dead in its tracks.
Robert Craven
Key – central bankers rarely understand FI price determination, the workings of the auction market. This was especially true with Greenspan, is true with Bernanke and apparently true with Carney. It is how and why they can get themselves in a lot of trouble.
However – and this is a really big “however” - the skill or instinct to predict FI price change is not a requirement for the chair to be successful. Any chair can stay out of trouble given he has a lick of sense. To be successful the chair must function under some rule of order; that is, policy fixed for all to understand. When the chair invents policy with all sorts of escape clauses and bells and whistles, as Carney has, and then compounds the problem by attempting to communicate through the noise and bullets, then that chair has stepped right into it.
Best would have been to stick with a 2% target but no, that was too easy.
Just ahead: Although she’s come along nicely, the UK economy has a few more pleasant surprises in store. Gilt prices will ease further. Carney will then hint at more QE. Sterling will tank. And even if it doesn’t the Bank’s buying of a few long bonds will not stop the hemorrhaging. That is not the way things will work. Gilt prices will erode still further. This will retard economic momentum or even stop it dead in its tracks.
Robert Craven
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