I can understand why savers are not happy this morning. They heard yesterday from The Governor of the Bank of England that Base rates are going to remain nailed to the floor for the time being. There is no relief in sight for savers, who have had a rough deal on savings rates ever since the crash in 2008. It will be the borrowers, including the state, that spend us out of the crash and slump of the last decade. They will enjoy more cheap borrowing this decade to spend beyond their means. The savers will not be allowed much return on their money, so they will lack spending power. They indeed will spend much of their time awaiting the knock at the door from the taxman, ever more inventive in finding ways of parting savers from their money.
When Mr Carney first thought of offering guidance about interest rates, he probably had in mind the need to tell people interest rates would be low for a long time to try to kick start the UK recovery. The background was worries about triple dip recessions, forecasters revising their growth forecasts down, and general pessimism about the UK’s prospects.
As he was preparing to take up the job, the need for future guidance also seemed to be underlined by the market wobble over the question of when and how Quantitative Easing would be reduced and stopped in the USA. A few words from Mr Bernanke at the Fed caused a sharp fall in markets, as people rushed to the premature conclusion that quantitative easing would stop and interest rates would go up before the end of this year. Mr Carney probably thought he needed to tell the markets that whatever happened to US rates, UK rates were fixed to the floor for the time being.
So it is one of those ironies of history that by the time Mr Carney came to give us his conclusions on forward guidance the backdrop was transformed. The UK was no longer going sideways, facing treble dip or suffering from an insurmountable double dip. The outlook as measured by second quarter GDP, forecast third quarter GDP, confidence indicators for manufacturing and services, and retail sales was suddenly bulllish. Forecasters are all busily revising up their 2013 and 2014 forecasts for growth. The OBR had to correct the misleading impression of double dip that the historic figures showed.
By the time Mr Carney spoke yesterday the question was not could he by his words bring the UK economy to life. It was rather, could he by his words avoid damaging the faster recovery now underway? Could he even satisfy the minority of his critics who were massing on the other side of the argument, to say that the danger now is too much cash and credit in circulation, too many pressures leading to asset bubbles and general inflation?
As it turned out Mr Carney’s statement was well judged, and should do no damage. It alters the reality of the position very little if at all. Most of us assumed the UK authorities were aiming to keep Base rate down at 0.5% this year and next to give the recovery a fair wind. Most of us forecast that the authorities will allow some growth in asset values as part of confidence boosting measures, without it getting out of hand any time soon.
The new Governor has said interest rates will stay down at 0.5% all the time unemployment is above 7%. He has forecast that unemployment will not drop below this figure this year next year or into 2016. The Bank would only reconsider this position if inflationary expectations rise too far too fast, or if there is potential damage to the financial system ahead, or if forecasts of inflation rise too high. These statements are delicately balanced. It means there are several circumstances in which short rates could have to rise earlier than planned. The central case of the Bank’s forecast is that short rates remain at 0.5% for at least two more years. That should not come as surprise to anyone who has been following this debate.
Now all that remains is to worry lest the economy does too well! Only if asset prices take off, activity puts upwards pressure on prices, and inflation expectations surge should borrowers worry about rising short term interest rates. That sounds much like the world we thought we lived in yesterday. It does not change my forecast of a reasonable recovery this year and next. Nor does it lead me to think, as some of the critics suggest, that the Bank is yet taking too much risk with excessive money and credit. It needs to be watched from here, but it is not yet a nasty bubble in the making. Meanwhile , pity the poor savers. They have to sit tight for very little, or take more risk in the hope they win rather than lose.