Mark Carney is gambling with his credibility

Risky, risky, risky.

In a dramatic break with history, at his first meeting as Governor,  Mark Carney persuaded the Bank of England’s, (BOE), Monetary Policy Committee, (MPC), to issue what amounted to forward guidance on the path of future monetary policy.

The key sentence in the statement issued by the MPC was, "The, (recently observed), significant upward movement in market interest rates, would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy".

There are arguments against, and arguments in favour of forward guidance. Against the guidance ties the committee’s hands and will make it look stupid if it subsequently has to adapt it too quickly, (almost by definition), and if it does have to change the message, that’s going to lead to ever-diminishing credibility for future guidance, i.e. the market will remember the committee’s ‘mistakes’ and not believe future guidance.

For: it represents "costless" intervention, in the narrow sense that the central bank doesn’t have to actually DO anything right now and, if the guidance does have to change direction later, then that will probably be because the initial guidance has done its work - having lead to the desired economic adjustment.

The substance of today’s messages from both the BOE and the European Central Bank, (ECB), which used a similar tactic, was that they had seen their yield curves steepen dramatically since the market became obsessed with "tapering" in the US-the process by which the Fed may wind down its programme of Quantitative Easing, and that they could neither understand this phenomenon nor stand idly by and watch it happen. To paraphrase their message- "never mind the US, or the Fed, look at our economies and ask yourself, why would you expect us to raise rates any sooner now than you did two months ago". Fair enough and, in the ECB’s case, a very good point.

However, I think Carney has started his encumbency with a very risky gamble. Whilst the Eurozone economy has been flatlining and boasts economies best described as ranging from zombie to plunging, the UK economic data has recently given us some distinctly pleasant surprises - the latest being the Services Purchasing Managers’ Index-representing a massive sector of the economy- and quite a robust housing market recovery. Let us also not forget that UK inflation remains stubbornly high and shows no real tendency to fall. Maybe not today, maybe not tomorrow, but probably by Christmas, I think the BOE will have to subtly change today’s attempt at guidance and investors who bought gilts on the back of today’s BOE statement may come to regret that before long.

Bank of England Governor, Mark Carney. Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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John McDonnell interview: "We’re going to destroy Osborne’s credibility"

The shadow chancellor on the Spending Review, Jeremy Corbyn's leadership and why trade unions will have to break the law. 

When I interviewed John McDonnell in March, before the general election, he predicted that Labour would be the largest party and confessed to a “sneaking feeling that we could win a small majority – because I think the Tory vote is really soft”. As the long-standing chair of the Socialist Campaign Group, McDonnell anticipated leading the resistance inside Labour to any spending cuts made by Ed Miliband. Eight months later, he is indeed campaigning against austerity – but as shadow chancellor against a Conservative majority government.

I meet McDonnell in his new Westminster office in Norman Shaw South, a short walk down the corridor from that of his close friend and greatest ally, Jeremy Corbyn. The day before George Osborne delivers his Spending Review and Autumn Statement, his desk is cluttered with economic papers in preparation for his response.

“The message we’re trying to get across is that this concept of the Tories’ having a ‘long-term economic plan’ is an absolute myth and they’re in chaos, really in chaos on many fronts,” he tells me. McDonnell points to the revolt against cuts to tax credits and policing, and the social care crisis, as evidence that Osborne’s programme is unravelling. On health, he says: “He’s trying to dig out money as best as he can for the NHS, he’s announced the frontloading of some of it, but that simply covers the deficits that there are. Behind that, he’s looking for £22bn of savings, so this winter the NHS is going to be in crisis again.”

Asked what Labour’s equivalent is to the Tories’ undeniably effective “long-term economic plan” message, he said: “I don’t think we’re going to get into one-liners in that way. We’ll be more sophisticated in the way that we communicate. We’re going to have an intelligent and a mature economic debate. If I hear again that they’re going to ‘fix the roof while the sun shines’ I will throw up. It’s nauseating, isn’t it? It reduces debate, intellectual debate, economic debate, to the lowest level of a slogan. That’s why we’re in the mess we are.”

Having abandoned his original support for the Chancellor’s fiscal charter, which mandated a budget surplus by 2020, McDonnell makes an unashamed case for borrowing to invest. “The biggest failure of the last five years under Osborne is the failure to invest,” he says. “Borrowing at the moment is at its cheapest level, but in addition to that I’m not even sure we’ll need to borrow great amounts, because we can get more efficient spending in terms of government spending. If we can address the tax cuts that have gone ahead, particularly around corporation tax, that will give us the resources to actually start paying again in terms of investment.”

He promises a “line-by-line budget review” when I ask whether there are any areas in which he believes spending should be reduced. “My background is hard-nosed bureaucrat . . . we’ll be looking at where we can shift expenditure into more productive areas.”

From 1982 until 1985, John McDonnell, who is 64, was chair of finance at the Greater London Council under Ken Livingstone. After vowing to defy the Thatcher government’s rate-capping policy he was sacked by Livingstone, who accused him of manipulating figures for political purposes. “We’re going to look like the biggest fucking liars since Goebbels,” the future mayor of London told him. McDonnell, who later described Livingstone’s account as “complete fiction”, has since resolved his differences with the man now co-chairing Labour’s defence review.

After his election as the MP for Hayes and Harlington in 1997, McDonnell achieved renown as one of New Labour’s most vociferous opponents, rebelling with a frequency rivalled only by Corbyn. His appointment as shadow chancellor was the most divisive of the Labour leader’s reshuffle. “People like Jeremy even if they don’t agree with him. People don’t like John,” one MP told me at the time. Mindful of this, McDonnell has sought to transform his image. He has apologised for his past praise of the IRA and for joking about assassinating Margaret Thatcher, rebranding himself as a “boring bank manager”. But there are moments when his more radical side surfaces.

He told me that he supports workers breaking the law if the trade union bill, which would limit the right to strike, is passed. “It’s inevitable, I think it’s inevitable. If the bill is introduced in its existing form and is used against any particular trade unionist or trade union, I think it’s inevitable that people will resist. We established our rights by campaigning against unjust laws and taking the risk if necessary. I think that’s inevitable and I’ll support them.”

“Chaos” might be how McDonnell describes Osborne’s position but the same term is now daily applied to Labour. The party is riven over air strikes in Syria and the renewal of Trident and MPs are ever more scornful of Corbyn’s leadership.

While Corbyn has so far refused to offer Labour MPs a free vote on Syria, McDonnell says that he favours one and would oppose military action. “My position on wars has always been that it’s a moral issue and therefore I veer towards free votes . . . We’re waiting for Cameron’s statement; we’ll analyse that, there’ll be a discussion in shadow cabinet and in the PLP [Parliamentary Labour Party] and then we’ll make a decision. I’m still in a situation where I’ve expressed the view that I’m opposed to the bombing campaign or engagement. I think the history of the UK involvement in the Middle East has been a disaster, to say the least . . .This isn’t like the Second World War where you have a military campaign – you defeat the enemy, you sign a peace agreement and that’s it – this is asymmetric warfare. In addition to the risks that are in the battlefield there’s a risk in every community in our land as a result of it.”

Would he want any of the 14 former shadow cabinet members who refused to serve under Corbyn to return? “All of them, we’re trying to get them all back. We’ve got Yvette [Cooper] helping us on a review we’re doing about the economy and women . . . It’s an open door policy, I’m trying to meet them all over these next few weeks.”

Livingstone, a member of Labour’s National Executive Committee, recently called for Simon Danczuk, who revealed details of a private meeting with Corbyn in the Mail on Sunday, and Frank Field, who told me that MPs should run as independents if deselected, to be disciplined. But McDonnell takes a more conciliatory line. “With Simon [Danczuk] in particular and the others, it’s just a matter of saying look at the long-term interests of the party. People don’t vote for a divided party. They’ll accept, though, that within a party you can have democratic debate. As I said time and time again, don’t mistake democracy for division. It’s the way in which you express those different views that are important. All I’m saying is let people express their views, let’s have democratic engagement but please don’t personalise this. I think there’s a reaction within the community, not just the party, against personalised politics. It’s not Jeremy’s style, he never responds in that way. It’s unfortunate but we’ll get through it. It’s just minor elements of it, that’s all.”

McDonnell disavows moves by some in Momentum, the Corbyn-aligned group, to deselect critical MPs. “What we’re not into is deselecting people, what we want to try and do is make sure that everyone’s involved in a democratic engagement process, simple as that.

“So I’ve said time and time again, this isn’t about deselection or whatever. But at the same what we’re trying to say to everybody is even if you disagree, treat each other with respect. At the height of the debates around tuition fees and the Iraq war, even though we had heated disagreements we always treated each other with mutual respect and I think we’ve got to adhere to that. Anyone who’s not doing that just lets themselves down, that’s not the culture of the Labour Party.”

In private, the 90 per cent of MPs who did not support Corbyn’s leadership bid speak often of how and when he could be removed. One point of debate is whether, under the current rules, the Labour leader would automatically make the ballot if challenged or be forced to re-seek nominations. McDonnell is emphatic that the former is the case: “Oh yeah, that’s the rule, yeah.”

McDonnell’s recent media performances have been praised by MPs, and he is spoken of by some on the left as a possible replacement if Corbyn is removed or stands down before 2020. His speech to the PLP on 23 November was described to me by one shadow minister as a “leadership bid”. But McDonnell rules out standing in any future contest. “No, no, I’ve tried twice [in 2007 and 2010], I’m not going to try again, there’s no way I would.”

Despite opinion polls showing Labour as much as 15 points behind the Conservatives, McDonnell insists that the party can win in 2020. “Oh definitely, yeah, you’ll see that. I think this next year’s going to be pivotal for us. We’re going to destroy Osborne’s credibility over the next six months. But more importantly than that, we can’t just be a negative party . . . we’re going to present a positive view of what Labour’s future will be and the future of the economy.

“Over the next 18 months, we’ll be in a situation where we’ve destroyed the Tories’ economic reputation and we’ve built up our own but we’ll do it in a visionary way that presents people with a real alternative.”  

George Eaton is political editor of the New Statesman.