Mark Carney: time lord?

Is the bank of England Governor messing with the very fabric of time?

Time isn’t a very interesting idea to a physicist. There is the unchangeable past and the unpredictable future. “Now” isn’t a definable concept. It’s not even fixed – you can bend it. Time is a sort of illusionary bi-product spit out as the universe goes from a state of order to one of chaos. Why politicians and central bankers would want to start messing with it is a mystery.

Mark Carney, the Governor of the Bank of England, and the Monetary Policy Committee have been lured into the time game. They expect one of their trigger points, unemployment, to drop below 7 percent in 2016 at which point they’ll have a look at what they might - or might not do. In the world of the Bank of England this constitutes "delivering a measure of certainty". The previous governor, Sir Mervyn King, just used to say "I don’t know" when faced with demands for definiteness.

With unemployment currently at 7.8 per cent three years seems a long and unambitious timescale to set yourself such a meager target. Carney says that to achieve the 7 per cent unemployment rate a million jobs will have to be created – 750,000 new ones and 250,000 to compensate for planned reductions in public jobs and that is what will take the time.  Markets disagree and have pumped up their rate increase expectation to as early as next summer. Somebody is wrong.

Perversely, if you were Chancellor of the Exchequer, George Osborne, or a Conservative Party election campaign organizer, you might be pretty happy with the idea that unemployment wasn’t going to fall any time soon. The reason is simple – over the years the multiple of house prices to earnings has risen for about 3.5 to 6.5 for England as a whole (your main electoral battle ground) and the electorate has become twice as sensitive to interest rate movements today as they were twenty years ago (see graph). Get interest rate policy wrong and it could have electoral consequences.

By mapping where house prices are highest relative to earnings it’s easy to show that above average interest rate sensitivity lies almost exclusively in Conservative-held boundaries; the East, South East and South West (see second graph).  London is the exception but suffers the double whammy of being both the most leveraged part of the country AND dominated by Labour. You’ll get no votes from Londoners for increasing interest rates too soon.

Also the higher house price-to-earnings regions are associated with areas with higher salaries which already carry the highest level of taxation. Those earning up to £50,000 a year now have total deductions (National Insurance and Income Tax) of about 20 per cent whilst if you earn between £50,000 – 100,000 this rises to 32 per cent. In the £100,000 to 200,000 bracket your annual deductions bill averages 40 per cent of gross salary. By linking housing costs (i.e. an interest only mortgage) to where you are on the income scales it can be shown that for every 0.5 per cent interest rate increase could lead an equivalent of between 2 per cent and 4 per cent increase income tax. Increasing interest rates in that sense hits traditional Conservative voters harder than potential converts from the Liberal Democrats of even Labour.

None of this should come as a surprise to people but the extent of the apparent hyper-sensitivity of the electorate to interest movements is going to be more economically and politically important at the next general election than it has ever been before. The MPC will have to be doubly sure they have a self-sustaining economic cycle, embedded in a stable global background, before increasing interest rates. It may even be why they have set their earliest revue date to beyond the next general election. In that sense Mark Carney has been right to dampen the enthusiasm the markets have shown for marginally stronger UK data recently whilst if you were Conservative Party Chairman you would be praying that not too many jobs are created too quickly especially before the General Election in 2015.  

 

        

Source: HM Land Registry

                                 

Mark Carney. Photograph: Getty Images

Head of Fixed Income and Macro, Old Mutual Global Investors

Photo: Getty
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Why Ukip might not be dead just yet

Nigel Farage's party might have a second act in it. 

Remember Ukip? Their former leader Nigel Farage is carving out a living as a radio shock jock and part-time film critic. The party is currently midway through a leadership election to replace Paul Nuttall, who quit his post following their disastrous showing at the general election.

They are already facing increasing financial pressure thanks to the loss of short money and, now they no longer have any MPs, their parliamentary office in Westminster, too. There may be bigger blows to come. In March 2019, their 24 MEPs will all lose their posts when Britain leaves the European Union, denying another source of funding. In May 2021, if Ukip’s disastrous showing in the general election is echoed in the Welsh Assembly, the last significant group of full-time Ukip politicians will lose their seats.

To make matters worse, the party could be badly split if Anne-Marie Waters, the founder of Sharia Watch, is elected leader, as many of the party’s MEPs have vowed to quit if she wins or is appointed deputy leader by the expected winner, Peter Whittle.

Yet when you talk to Ukip officials or politicians, they aren’t despairing, yet. 

Because paradoxically, they agree with Remainers: Theresa May’s Brexit deal will disappoint. Any deal including a "divorce bill" – which any deal will include – will fall short of May's rhetoric at the start of negotiations. "People are willing to have a little turbulence," says one senior figure about any economic fallout, "but not if you tell them you haven't. We saw that with Brown and the end of boom and bust. That'll be where the government is in March 2019."

They believe if Ukip can survive as a going concern until March 2019, then they will be well-placed for a revival. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.