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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Why Theresa May can't end speculation of an early general election

Both Conservative and Labour MPs regard a contest next year as the solution to their problems. 

One of Theresa May’s first acts as a Conservative leadership candidate was to rule out an early general election. After a tumultuous 2015 contest and the EU referendum, her view was that the country required a period of stability (a view shared by voters). Many newly-elected Tory MPs, fearful of a Brexit-inspired Ukip or Liberal Democrat surge, supported her on this condition.

After entering Downing Street, May reaffirmed her stance. “The Prime Minister could not have been clearer,” a senior source told me. “There won’t be an early election.” Maintaining this pledge is an important part of May’s straight-talking image.

But though No.10 has wisely avoided publicly contemplating an election (unlike Gordon Brown), the question refuses to die. The Conservatives have a majority of just 12 - the smallest of any single-party government since 1974 - and, as David Cameron found, legislative defeats almost inevitably follow. May’s vow to lift the ban on new grammar schools looks to many like an unachievable task. Former education secretary Nicky Morgan and former business minister Anna Soubry are among the Tories leading the charge against the measure (which did not feature in the 2015 Conservative manifesto).  

To this problem, an early election appears to be the solution. The Tories retain a substantial opinion poll lead over Labour, the most divided opposition in recent history. An election victory would give May the mandate for new policies that she presently lacks.

“I don’t believe Theresa May wishes to hold an early election which there is evidence that the country doesn’t want and which, given the current state of the Labour Party, might be seen as opportunistic,” Nigel Lawson told today’s Times“If, however, the government were to find that it couldn’t get its legislation through the House of Commons, then a wholly new situation would arise.”

It is not only Conservatives who are keeping the possibility of an early election alive. Many Labour MPs are pleading for one in the belief that it would end Jeremy Corbyn’s leadership. An early contest would also pre-empt the boundary changes planned in 2018, which are forecast to cost the party 23 seats.

For Corbyn, the possibility of an election is a vital means of disciplining MPs. Allies also hope that the failed revolt against his leadership, which Labour members blame for the party’s unpopularity, would allow him to remain leader even if defeated.

Unlike her predecessors, May faces the obstacle of the Fixed-Term Parliaments Act (under which the next election will be on 7 May 2020). Yet it is not an insurmountable one. The legislation can be suspended with the backing of two-thirds of MPs, or through a vote of no confidence in the government. Alternatively, the act could simply be repealed or amended. Labour and the Liberal Democrats, who have demanded an early election, would struggle to resist May if she called their bluff.

To many, it simply looks like an offer too good to refuse. Which is why, however hard May swats this fly, it will keep coming back. 

George Eaton is political editor of the New Statesman.