Right message, wrong time
It's precisely the wrong moment for central bankers to say they’re unimpressed.
This week saw the publication of the minutes of the Bank of England’s Monetary Policy Committee’s, (MPC), last meeting, on 3/4th July. They revealed that the decision to refrain from more Quantitative Easing, (QE), was unanimous. This makes it all the more likely that the publication of next month’s Bank of England quarterly Inflation Report will be accompanied by the introduction of so-called "forward guidance" on the future path of interest rates.
There are two variants of this seemingly arcane piece of central bank armament; "threshold dependent", the variety favoured by the Fed, where increases in rates are tied to metrics of economic performance, or the "time dependent" alternative tentatively embraced by the ECB, which promises to keep rates low, "for an extended period", say. My guess would be that the MPC will also go for the latter, as it is more likely to gain unanimous support on the committee.
Personally, for the UK, I find these policies at best a flawed concept, at worst quite probably counter-productive, and almost certainly bad for central bank credibility in the long run.
It’s the right message, at the wrong time.
Four years ago, say, (when Mark Carney blazed the trail by introducing such guidance in Canada), it would have been a great idea, as we had just narrowly avoided financial Armageddon and thought it was quite possible that the economy had entered a permanent winter. Right now, however, things are very different; the green shoots of recovery are well above ground, and it’s precisely the wrong moment for central bankers to damage psychologies by telling us they’re not terribly impressed by our efforts and think they’ll have to keep rates low for years. I’d further posit that the fear of rates going higher is, across the economy as a whole, not the major pre-occupation for individuals and businesses. Nobody is afraid that rates will return to the 15 per cent we saw in the early nineties in the UK; borrowing costs of 6 or 7 per cent do not seem life-threatening compared to the present 4 or 5 per cent.
No yield curve forever also drives the bankers’ dream of a return to 3-6-3 banking even further over the horizon, (borrow at 3 per cent, lend at 6 per cent, and on the golf course with the client by 6pm). Instead, why not borrow at 0.5 per cent and use the money to buy Gilts at 2.25 per cent, with zero credit risk-wonderful for bank balance sheets, but not much help for the economy?
Meanwhile, investors with spare cash don’t find 0.1 per cent deposit rates too exciting and are happy to plunge into emerging market corporate bonds at 4 per cent - which, ironically, is just the sort of mis-pricing of risk that is spooking central bankers.